Potential shifts to the policy landscape remain in focus for markets, where uncertainty still reigns on most fronts. Polls for the French Presidential Election have tightened. A Le Pen victory remains unlikely but cannot be ruled out. Politics will continue to be at the fore elsewhere in Europe, with the Dutch election, the UK triggering Art. 50, turmoil in Italy and ongoing negotiations with Greece. Prospects for the key pillars of Trump's economic agenda also remain uncertain. Markets have better clarity on other fronts: a chorus of more hawkish Fed rhetoric jolted expectations for a March hike.
Counterbalancing this uncertainty is a broad-based uptick in global growth momentum, which has supported market sentiment. In the US, surveys point to robust growth, and consumer and business sentiment are showing signs of animal spirits, though hard data have been somewhat weaker. Europe has been an upside surprise, with supportive data tilting the balance of risks in a more positive direction. The growth story is also cautiously more positive in China and EM more broadly.
Improved growth and inflation prospects are allowing developed market central banks to sketch their exits from extreme accommodation at varying speeds. The Fed should raise rates three times this year. The ECB, meanwhile, is slowly shifting toward a less dovish stance, with an announcement of a tapering of QE towards zero likely by yearend. No further easing is expected from the Bank of Japan and the Bank of England.
The push and pull between solid growth momentum and political risks looks set to continue in the near-term. On net, this should support risk assets, especially in the US, though there are some cautionary signals in Europe. Developed market bond yields should continue to climb higher, and the dollar is set to strengthen further.
David Folkerts-Landau, Group Chief Economist
Key pages this month:
P7 What to watch for at the March Fed meeting
P8 Trump’s policy agenda
P9-10 French election updat [more]