The Nasdaq Composite has plunged since last week, stoking market fears that the shakeout could mark the start of a significant fallout in technology stocks and possibly to the broader US equity market. While the ascent for tech stocks was fast and furious, I expect the downside to be limited and won’t be as severe.

• Tech stocks plunged last week, dragging down major global indexes with them.
• Some are suggesting this is the start of another dramatic sell-off, similar to the spring of 2000 when the “tech bubble” burst. I highly doubt that. 
• There are three reasons why I believe that tech stocks are not experiencing another bursting bubble.
   

• The Federal Reserve does not believe there is a strong correlation between unemployment and inflation, and its new inflation target policy reflects that. 
• Prime Minister Shinzo Abe’s departure raises legitimate concerns about the future given that his time in office has been positive for Japan.
• US consumers appear to be more pessimistic, which is a concern for the economy. However, accommodative Fed policy should be supportive of risk assets.
   

In July, global equity markets were lifted higher by US stocks, particularly technology companies, which diverged from other markets where returns were more mixed. Elsewhere, concerns about a second wave of Covid-19 and rising trade tensions between the US and China weighed on sentiment with both UK and European indices falling back.
The pick-up in infections may slow the rate of recovery in the second half of the year and make the growth path more uncertain, especially in the US. 

• As expected, the odds of a timely Phase 4 US fiscal stimulus deal worsened last week, as Congress left for recess until September.
• With no explanation, the US and China called off talks that were scheduled for this weekend to review both sides’ adherence to January’s Phase 1 trade agreement.
• Last week saw more optimism around the development of a vaccine as well as positive economic data.

Greg Holland, Client Portfolio Manager, Invesco’s Growth Equities Team, shares some of the favorite themes of consumer trends and how they’re being impacted by Coronavirus in this video.

• I believe Republicans will feel less urgency to reach a compromise with Democrats on US fiscal stimulus, as they have been given cover by the Trump administration’s executive orders and the better-than-expected July jobs report.
• While US-China tensions are worsening, the good news is that Chinese consumers do not appear to be punishing US companies over the situation. 
• The choice of a running mate isn’t usually a big issue in the US presidential election, but I think Joe Biden’s vice-presidential selection will matter this year.
   

• The US Senate still seems far from reaching a deal on fiscal stimulus — at least one that addresses all the pressing needs facing America, including state and local funding.
• If schools in the US open for in-person classes, I fear it could hasten a second wave of infections, which could lead many Americans to return to “self-quarantine.”
• I anticipate a short-term decoupling of the US economy (and other economies that aren’t able to control the virus) from most other major economies that are likely to see continued improvement.

• The European Union exhibited amazing cooperation in agreeing upon a record stimulus package.
• The US, on the other hand, has moved further away from reaching a deal on additional stimulus — even though jobless claims and COVID-19 cases are both rising.
• Given these developments, I expect to see continued strength for the euro, and I believe European assets may be more attractive to investors than US stocks in the near term.

• More fiscal stimulus appears to be on the way for the US, which I believe is movement in the right direction. 
• I expect the US to fall into a pattern where, every month or two, Congress must pass a new stimulus package to keep the economy going, especially if the curve is not successfully bent.
• There has been some good news on the health front as well, as vaccine trials show progress, while the evidence for wearing masks grows.

Global equity markets continue to take solace from the fact that governments and central banks appear to be working together to alleviate the impact of the virus-inspired recession and support ailing economies.

Despite the recovery in markets, the world feels like a fragile place.  In the face of what is the deepest global recession in living memory,  equity markets continue to run higher. The focus seems to be on policy support and improved economic momentum, yet earnings seemed destined to disappoint. 

Last week, we saw increases in both the Chinese and US stock markets. But that’s where the similarities end — there is currently a meaningful difference in market confidence for the prospects for longer-term economic recovery.

China A-shares have staged a strong +32% rebound since the lows in March and around 15% in the last week and remain my favorite asset class. Although I am cautious about sentiment driven rallies and I wouldn’t be chasing the market, I think that the recent outperformance continues to have legs for the rest of the year because of 4 key reasons

The US jobs report and Purchasing Managers’ Index data both improved in June, but rising infections remain a critical concern. I would not be surprised to see those numbers slip back in the coming months if policymakers become complacent. In my view, more fiscal stimulus is clearly needed as some companies continue to announce layoffs and file for bankruptcies while others are voluntarily re-closing stores.

It’s a challenge to craft a six-month outlook during a pandemic, but tumultuous times call for a focus on what we have historically learned about market and business cycles. Our base case is that the global economic recovery in its initial stages will be slow and uneven, and that there will be increased volatility for a variety of assets.

• We continue to receive positive economic news as developed world economies progress in their re-openings, but I’m also keeping an eye on some negative signs that could cause disruption.
• Positive signs include a surge in US retail sales, progress in US-China talks, signs of a major US infrastructure plan, and some promising medical news.
• Negative signs include rising coronavirus infection rates in the US and increased tension between North and South Korea.

E-commerce takes greater hold among food shoppers, while energy demand starts to recover.

Across the US, states are easing their lockdowns, and people are going back to the gym, eating out at restaurants, and taking summer road trips. At the same time, habits that were adopted or accelerated during lockdown — like online shopping — could represent a lasting shift as consumers grow accustomed to the convenience. 

Stocks have recovered globally to levels last seen in early March on fresh stimulus measures and hopes that economies are on the mend as lockdowns ease. The reopening of economies has been a common theme across the markets in recent weeks, as they largely shrugged off concerns over renewed tensions between the US and China after the US said that it no longer considers Hong Kong autonomous from China. The recovery in equity prices experienced in recent weeks can in large part be attributed to the expected impact of a dramatic easing of fiscal and monetary policies in all the major economies. 

• Despite a better-than-expected jobs report, the Federal Reserve believes the economic situation remains grim.
• The Fed believes the crisis response has been good, but more fiscal stimulus is needed.
• The Fed plans to remain very accommodative for a long time to come, and to do whatever it can to support the US economy

• I’m happy to report that the European Union, Japan, and China all announced more fiscal stimulus in the past several weeks.
• Grants, loans, corporate subsidies, worker benefits, and infrastructure spending are all part of the various packages.
• However, many emerging market countries aren’t able to offer significant fiscal stimulus, and we are unfortunately seeing the number of COVID-19 infections rise in some of these areas.

• History shows us that fiscal policy can be more effective in reducing unemployment than monetary policy because it is more direct.
• A notable example of this type of policy is the Work Projects Administration (WPA), which put millions back to work in the US during the Great Depression.
• While WPA jobs may have been temporary, they had a compounding effect on job creation that went beyond the initial hiring of workers.
   

Despite the continuing global spread of Covid-19, April saw both equity and credit markets stage a rebound, which has led to some of the biggest monthly gains certain sectors and regions have seen in years. 

Central bank stimulus designed to provide relief from the pandemic has provided some support while an experimental antiviral drug that appears to be effective in reducing recovery times has provided much-needed hope.  The drug could perhaps help countries emerge from the lockdown measures that are severely impacting economic activity worldwide.  More and more workers are losing their jobs, while many small businesses are asking for loans to keep afloat, and yet, the financial markets are reporting gains.
 

• I am convinced that rising US-China tensions are behind the recent volatility and weakness in stocks.
• A massive policy response has helped to bolster stocks against the economic impact of COVID-19, but I don’t believe stocks could easily shrug off a reignition in the US-China tariff war.
• On the positive side, Chinese Vice Premier Liu He, US Trade Representative Robert Lighthizer, and US Treasury Secretary Steven Mnuchin have had far more amicable relations.

• Amidst all the terrible data in the April US jobs reports, there was one obvious and glaring takeaway: Job losses were concentrated among low-wage workers.
• It’s critically important to focus on negotiations in Congress about another stimulus package — in particular, what Congress is doing to help American households remain solvent.
• Given the massive monetary stimulus the Federal Reserve has provided, a lack of adequate fiscal stimulus would likely be a bigger problem for the economy than the stock market.

• April saw a massive worldwide response to the coronavirus, including significant monetary and fiscal stimulus and widespread lockdowns. 
• But as we enter May, we are seeing differences in approach come to the fore — between countries, between localities, and between political parties. 
• Here are some of the key issues that we will be watching in May to help determine the shape of the economic recovery.

The level of opportunity will vary greatly by location and sector

Find out more from a short animated film from Invesco to learn the features and risks of FMP.

• While the Federal Reserve has bent over backwards to provide accommodation to support the US economy and markets, fiscal stimulus is still a work in progress. 
• Despite Congress coming fresh-off passing the Phase 3.5 fiscal stimulus, there is already talk in Washington of Phase 4.
• While previous negotiations saw a good deal of cooperation among party leaders, it’s expected that politicians this time around may advocate more strongly for particular issues.
   

The global equity market rout continued through March as the human and economic cost of the Covid-19 pandemic mounts. Against this backdrop, central banks around the world have taken aggressive action to support local markets and the global economy as a whole as world-wide recessionary fears grow higher. Amid a surge in demand for perceived ‘safe haven’ assets, investors have had to weigh up the positive influence of central bank easing policies against an expected surge in borrowing from unprecedented levels of fiscal stimulus, sparking volatility in government bonds over the period.

• In the base case,  real GDP growth bottoms in 2020 Q2 at around -35% (measured quarter-on-quarter at a seasonally adjusted annualized rate), before gradually returning to its pre-Covid-19 growth trend in late 2021, although its level will be lower than its previous trajectory. The subsequent rebound in economic growth is spread over ten quarters.
• In the optimistic case, the Covid-19 pandemic lasts for a shorter period, with a correspondingly shallower recession. In a very optimistic scenario, the current (first) wave of the virus will be the only wave, and social restrictions will be loosened sometime in 2020 Q2. This leads to a quarter-on-quarter annualized contraction of perhaps 35% in 2020 Q2, before a relatively robust recovery, with economic activity returning to its pre-crisis level in 2021 Q2.
• In the pessimistic case, which is the most difficult to forecast, the Covid-19 pandemic lasts for significantly over a year, and the recovery to trend growth once the public health crisis is resolved and restrictions are eventually lifted is slow and staggered. Real GDP growth could easily fall in excess of 50% quarter-on-quarter (at a seasonally adjusted annualized rate), and for multiple quarters as the real economy continues to be locked down. 
   

• Yesterday’s WTI move is a technical aberration and does not truly reflect what’s going on in the commodities world. The bigger more systemic problem I worry about is on the demand side – due to the economic recession caused by the COVID-19 lockdown.
• In this baseline scenario, I expect growth to bounce back in certain markets that experience an initial release, but that overall global growth over the next year to be weak and tentative. 
• I think that oil and other growth-geared commodities are accurately pricing in this scenario whereas equity investors are pricing in more of a mild recession.
   

• My colleagues from the Global Market Strategy Office and I answer some of the most pressing questions we have received from clients in recent days.
• Although there is a distinct threat of a second wave of COVID-19 infections in China, we don’t think it will meaningfully disrupt the economic recovery.
• We expect the US to get a Phase 3.5 stimulus package soon. After some political discord, it appears that negotiations in Congress have become more constructive.

• The World Trade Organization issues a wide-ranging estimate for global trade in 2020.
• The Federal Reserve unveils more tools to help the US economy, while Congress debates its next step.
• A handful of countries prepare to reopen schools and markets.

• Markets continue to struggle with the likely impact of the unprecedented monetary and fiscal policy measures taken to stem the coronavirus crisis, with every new effort to slow the spread of Covid-19 further deepening the impact on economies and societies.
• While it is too early to tell if these unprecedented asset purchases by central banks will be inflationary, we should remember that it is not the size and duration of central bank asset purchases that matters, but the impact of those purchases on the amount of money held in the commercial banking system.
• In contrast with recently expressed concerns that central banks’ and governments’ trillion-dollar life-support measures will bring about a period of high inflation, I argue that inflation will not have to feature in a post-pandemic world.

• This month will be critical in assessing the global response to the coronavirus crisis.
• With that in mind, there are six issues in particular that I’ll be tracking closely.
• There are also two issues that have garnered recent headlines, but that I’m less worried about in the long run.

PMs weigh in on business trends, balance sheets, disciplined approaches and Federal Reserve policy.

• Several tactical indicators imply that US stocks are getting closer to a bottom, but other indicators suggest that the process is incomplete.
• For US bonds, highly rated credit still looks attractive to us, but high yield bonds will likely prove more challenging for investors.
• Diversification is more important than ever but is harder to achieve than usual, given that assets are moving together.

• Today, my weekly blog features several members of Invesco’s Global Market Strategy Office from Hong Kong, Italy, London, Tokyo and New York. 
• They answer the most pressing questions they’ve been hearing from investors who are concerned about COVID-19 and its impact on the global economy. 
• What can we learn from the hardest-hit countries, and what does this all mean for markets?

• As European leaders have begun to understand the extent of the crisis threatening their economies and their way of life Covid-19, the wheels of government and central banks have gradually moved into motion, and at last the measures are starting to look more equal to the task.
• In that context it is a huge relief that the ECB, under its new leadership, has finally grasped the scale of the task ahead and is responding accordingly. 
• A major economic downturn is possible in the short term, but now that central banks and governments have clearly shifted to a far higher level of activism the prospects that the crisis can be overcome in a shorter timeframe are much brighter.

Global equities fell sharply over the month as news emerged that the spread of the coronavirus was accelerating outside of China. As sentiment got increasingly worse through the month, market participants flocked towards perceived ‘safe haven’ assets. All sectors saw a decline with the worst hit being the travel and leisure stocks such as airliners and hotels have experienced sharpest falls as cautious consumers forgo holiday plans and governments continue to increase restrictions/guidance on unnecessary travel. Core government bonds and commodities such as gold were the main beneficiaries against this backdrop.

• We believe a three-pronged policy response is necessary to limit the spread of coronavirus as well as its economic impact.
• Public health policy can help contain the virus, monetary policy can promote financial liquidity and functionality, and fiscal policies can help contain economic damage.
• We would also like to see greater international coordination and cooperation to signal that national governments see this crisis as a shared shock with shared solutions.

• In a surprise move, the Federal Reserve cut its benchmark interest rate to 0 – 0.25% on Sunday and instituted largescale asset purchases.
• By cutting interest rates close to 0 and re-starting quantitative easing, the Fed is ensuring that financial institutions have the cash and liquidity to lend support to businesses and people affected by the outbreak.
• Lower oil prices and interest rates will be supportive to consumers. Risk assets such as US high yield and equities are becoming more attractive as they have come down sharply from their premium multiples just a month ago.     

• Over the past few days, investors’ attention has quickly shifted from COVID-19 new infections to whether the US, Europe and the UK economies will slide into recession or not.
• We continue to expect an extreme ‘risk off’ environment with investors flocking to ‘safe haven’ asset classes such as US Treasuries, the yen and gold. In volatile times such as this, investors should remain well diversified with adequate exposure to risk assets.
• We tend to believe that we live in the most uncertain of times, but we do not. We will get through this as we have gotten through each of the past crises of our time and throughout history. Think long term and stay the course.

• Markets have continued the coronavirus-related sell-off experienced over the last several weeks, while oil prices saw a steepening price drop.
• The double-whammy of the coronavirus outbreak and the flooding of the oil supply (and resultant pressure on oil producers) is causing a dramatic reaction in equity, fixed income, currency, and oil markets.
• Our end-of-cycle dashboard signals are flashing, with long interest rates falling, the yield curve flattening meaningfully, energy prices collapsing, and high yield spreads widening meaningfully.

• The spread of the new coronavirus or COVID‐19 has wreaked havoc in financial markets and in economies across the world.
• In my view these reactions are understandable only in the short term and in light of the fact that nobody can accurately forecast the course of this scourge.
• In the medium and long term the US economy is in very good shape and the business cycle expansion is set to continue.

• For China, I suspect the economic data for February will represent the bottom, and that March data will indicate improvement. 
• In the US, we believe a V-shaped recovery is likely given favorable economic conditions in the country.
• For most major economies, depending on how the virus develops, we see the risk of a significant negative impact on growth through the second quarter of 2020 and possibly longer. 

• Coronavirus-related news and statistics released over the last few days are troubling. 
• However, I still hold out hope that this contagion will be short-lived.
• I will be closely following upcoming data releases in China, Japan, the US, and the eurozone.
   

The first half of January saw the US and China reaching ‘Phase One' of an economic and trade agreement, which provided some much-needed assurance to market participants following months of uncertainty. Economic data also showed signs of improvement globally and Brexit did eventually happen on 31 January 2020, the transition period essentially resulted in everything remaining the same – for now. However, this initial optimism was eventually dampened by a ‘black swan’ event nobody saw coming: the outbreak of the novel coronavirus that swiftly spread from China to other regions of the world.

• Apple announced that the coronavirus will cause it to miss revenue forecasts for the quarter, with problems on both the sales and production ends.
• In addition, Tesla and Alibaba have recently provided coronavirus-related earnings warnings, many factories in China remain closed, and OPEC cut its forecast for global growth in oil demand this year. 
• Despite many unanswered questions, I continue to believe that governments such as China and the US will provide the policy support needed to combat the effects of this epidemic.

• The Federal Reserve covered several special topics in its semi-annual Monetary Policy Report, including US manufacturing, as well as the role of monetary policy rules in times of uncertainty. 
• However, what got the greatest attention in the report was a brief nod to the potential of the coronavirus to negatively impact the global economy.
• It seems that the coronavirus is replacing the US-China tariff war as the main source of uncertainty for at least the early part of 2020. 

• Last week was a momentous one for markets, with coronavirus fears gripping markets and creating a risk-off environment.
• This week, I see the potential for continued market volatility, both to the upside and the downside.
• For the first time in a number of months, market participants are beginning to worry again about global economic growth, especially in light of the coronavirus contagion.
   

• The global financial market has been concerned by the growing number of Wuhan coronavirus cases and fatalities. 
• Historically, major episodes of contagion have impacted economies and markets.  For example, the SARS outbreak in 2003 had a material but relatively short-term economic and market impact. 
• In gauging the macroeconomic and market responses, we examine the differences in the structure of the Chinese and global economies today versus 2003.

• The US-China Phase 1 trade deal presents a paradox for markets: In my view, it’s inconsequential, yet extremely important.
• A Phase 1 deal was relatively easy to achieve because it tackled relatively easy issues. We have to expect that Phase 2 may be far more difficult to achieve. 
• Now that the US has signed the trade deal with China, will it turn its attention to the EU and escalate a trade war there?
   

Global equity markets rallied in December as optimism returned to the global trade outlook, policies from central banks remained supportive and investors took the view that ultra-low interest rates would remain in place for longer. The US markets performed strongly, wrapping up one of their best years on record.  European equities also enjoyed a year-end rally. The emerging markets also registered broad gains in response to the phase one trade agreement between the US and China.

• We do not believe that a US-Iran war is likely at this juncture, but it’s important to understand the potential effects that a worst-case scenario could have on the markets.
• Historically, serious military conflict has been one of the more reliable triggers for an equity bear market.
• If the US-Iran situation worsens, there could be a range of effects on various asset classes.

• As 2020 begins, some of the issues we’re watching remain the same as last year, and others are just beginning to take shape.
• The conflict in the Middle East tops the list of issues to watch, followed by Brexit, trade, the Federal Reserve, and emerging market stock performance. 
• Markets have had a fairly modest reaction to the recent US-Iranian conflict, but will that last?

• Both the UK election and the US-China Phase 1 trade deal promise to bring far more clarity for businesses as they plan for 2020 and beyond.
• This could be a welcome gift for the economy and the stock market as we enter the holiday season.
• But while both are very positive developments, it’s important to remember that nothing is a “done deal.”

• Conservatives won a clear majority in the Dec. 12 UK Parliamentary election, giving us more certainty that the UK will leave the European Union (EU) by Jan. 31.
• Trade negotiations between the UK and EU may linger past December 2020. 
• In our view, the economic effects should be a gradual and sustained recovery in investment and a reversion to a higher growth rate between the eurozone and the US

• This week will likely go down in history as when the World Trade Organization (WTO) ceased to function effectively. 
• I foresee an era of what I call “vigilante protectionism,” where countries forego traditional institutions like the WTO and act on their own to further their trade interests.  
• The longer that trade disruption continues, the more damage it can do to free trade and global growth.
   

• In 2020, we expect continued monetary policy accommodation with little fiscal stimulus. 
• Therefore, we are more optimistic about capital markets than we are about the overall economy, and we favor risk assets over non-risk assets for 2020.
• We detail our forecasts for each region and asset class. 

• Last week brought a number of key developments from central banks around the world.
• These updates come at a time when the global economy is coming under pressure.
• Although central bank tools may be becoming less effective, I believe they will still be impactful — especially for the stock market.
   

• The Dec. 12 UK Parliamentary election is a difficult contest to call with many moving parts.
• We expect a clear Conservative majority, which should bode well for the prime minister’s Brexit agreement.
• However, even with an agreement, the real work would start when negotiating the future UK-EU relationship. Hence, any post-election market relief may be short-lived.
   

• The last several weeks have seen sentiment around US-China trade relations grow increasingly positive.
• I don’t believe that even Phase 1 of the trade deal is guaranteed to happen. Tariff rollbacks and agriculture purchases remain topics of debate.
• China seems to have the luxury of waiting, as its economic data appears to be stabilizing. 
   

• Federal Reserve Chair Jay Powell assured markets that the Fed will not raise rates until inflation increases significantly.
• Essentially, this gives stocks free rein to perform as they will without the concern that the Fed will unexpectedly tighten its grip.
• Three potential rally-stoppers loom ahead, but I expect a strong positive bias for stocks in the coming weeks.
   

• Last week was a “risk on” week for the markets, with stocks rising. But this week is when the rubber meets the road.
• Investors will be closely watching Fed Chair Jay Powell’s press conference for signs about the central bank’s outlook.
• Additionally, several important economic data will be released this week on China and the eurozone.
   

• October is viewed as a scary month for the stock market — but statistics show that October has not historically been the worst month for stock market performance.
• And yet, I sense a high level of trepidation about this particular October, given the uncertainty we see around many issues.
• So, this week I want to face these fears more closely and examine five issues that might be scaring investors right now.

• US President Donald Trump announced that the US and China had agreed in principle to a trade accord. However, China has stopped short of calling this a “deal.”
• Details are sparse in several areas, and one major item — Huawei Technologies — was not addressed.
• The agreement illustrates what we have been saying for some time: China has the upper hand in its negotiations with the US. 

• Political surprises and machinations have typically produced short-term market implications that prove to be mere blips in the long-term advance of US equities.
• I would implore tactically-minded investors to spend more time getting the bigger macro stories right rather than attempting to adjust their portfolios based on Washington intrigue.
• For longer-term investors, I believe it is most important to have a plan and stick with it.

• I believe investors should try to identify the geopolitical disruption that really matters for the economy and markets, and ignore the events that are just background noise.
• I assess today’s three major headlines and where they fall on the spectrum of “news versus noise” in relation to their potential longer-term impact on the markets.
• I examine impeachment in the US, the ongoing Brexit saga, and the US-China trade situation.
   

• Oil prices rebounded quickly last week after a drone strike on Saudi facilities.
• Having said that, tensions have risen in the Middle East as the fallout continues.
• Despite this, I believe there are a few reasons why stocks could perform well in the coming months. 

• ECB President Mario Draghi made it clear last week that governments need to step up fiscal stimulus. But what if they don’t? 
• That introduces the possibility of a new regime of very experimental monetary policy, such as helicopter money, that could simulate fiscal stimulus.
• While helicopter money certainly has its drawbacks, the concept of becoming a "spender of last resort" may be worth consideration by central banks such as the ECB.

• This edition of Weekly Market Compass examines the issues currently facing the US, Europe, and China.
• While the details differ in each region, the biggest commonality we discuss is a heavy shadow of uncertainty.
• We expect uncertainty to persist, offset by the efforts of policymakers and politicians to prevent downside risks from materializing. 

• August was anything but slow and relaxing for investors. 
• In September, there are five issues that I’m watching: Brexit, the tariff wars, the yield curve, Italy and the Fed.
• I believe investors should try to avoid the noise and not panic.

• Last week, we saw a serious escalation in the trade wars between the US and China.
• We have to be realistic that there is little the Federal Reserve can do to help.
• We will need to follow a variety of metrics to assess the economy, including metrics that can gauge the damage being created by tariff wars.

• Last week, the US Treasury yield curve briefly inverted, leading to a market sell-off. 
• I have received a number of questions about what other indicators to follow to help divine how the US economy is doing. 
• I discuss several other economic indicators to watch.

• There is a common trait I see at work in the trade wars today: Overconfidence bias. In particular, the “illusion of control” and the “desirability effect.” 
• In my view, the US has exhibited these two forms of overconfidence bias in its current trade policy. 
• But while markets are clearly jittery as I write this today, I believe central bank policies will help support risk assets even as the global economy decelerates.

• I believe the ongoing deterioration in US-China trade relations is a grave concern for the Federal Reserve.
• In my view, China is in a far better negotiating position than the US; it has far more tools it can use to combat the negative effects of tariffs.
• It the situation continues, the Federal Reserve may attempt further measures to bolster the US economy.

• It was no surprise that the Federal Reserve cut rates by 25 basis points. It is a surprise that it decided to end balance sheet normalization early.
• Fed Chair Powell said in the press conference that the “outlook remains favorable” – and therefore this move is intended to keep it that way (ounce of prevention worth pound of cure).
• The key takeaway is that the trade wars can be very dangerous – and the Fed is realizing this.

When central banks intervene, investors may need to rethink accepted risk//reward profiles

• Investors often waste precious time and valuable energy worrying about everything, but how many look back to see if what they were worried about in the past ever occurred? 
• The reality of many of these terrible things is that they were imagined in the first place, or they were manageable.
• I believe the problem for investors is that the more that we overreact to immediate dangers, then the less likely we are to meet our long-term goals. 
   

• Investors want the Fed to cut rates in July — some have even called for a cut of 50 basis points (bps). 
• I caution against expecting a 50 bps rate cut — I believe that would actually be cause for alarm. 
• But, I believe there are some compelling reasons for the Fed to cut rates 25 bps in July.

• One major risk that I have worried about for a year now was the potential for the next European Central Bank president to be a monetary policy hawk.
• However, that risk dissipated last week with the nomination of Christine Lagarde for the ECB presidency.
• Now a new risk — that the Fed won’t be able to justify a rate cut in the coming months — has arisen. 
   

• The US business cycle has set a new record for longevity. But what does this really mean for investors?
• Despite being the longest on record, the current business cycle has the indignity of being the weakest cycle in the post-World War II period. 
• The current open-ended policy environment of modest growth and modest inflation could keep the Federal Reserve at bay indefinitely and extend the cycle for longer than most expect.
   

• The Fed is leaning toward loosening monetary policy, with a possible rate cut on the table for July.
• The Fed is not alone, as several other central banks are exploring a more accommodative path.
• Central banks’ dovish turn is shaping my outlook for the back half of 2019. 

• The June 18-19 Federal Reserve meeting is very important because market expectations have gotten so dovish recently. 
• Some would argue a rate cut is hard to justify given that US economic data has been relatively strong. However, I think there are a few different ways that the Fed could justify a rate hike in the near term.
• I believe we will see at least some move toward more dovishness this week — including a hint that a rate hike may be likely to come soon.

• While the US-Mexico tariff situation has been resolved, the US-China trade dispute worsened in the last week. 
• The rise in protectionism was a major area of concern at the recent G-20 Finance Ministers’ meeting. 
• The silver lining is that, amidst many signs of a global economic slowdown and given the escalating trade war, central banks have been tilting toward more accommodation.
   

• The month of May was a game-changer for global markets. 
• US-China trade talks broke down, the UK prime minister resigned, North Korea fired missiles, and the US expanded the tariff war to Mexico.
• As June begins, I highlight four issues to watch.
   

• After Theresa May’s resignation, anything is possible for the future of Brexit.
• The results of Europe’s parliamentary election were fragmented, but pro-EU parties have continued to hold the majority.
• There was a total breakdown in trade talks between the US and China, with no plans for future talks.
   

• During his election campaign, Modi committed to boost investments into the Indian economy by cutting the cost of capital – investors can expect the Reserve Bank of India (RBI) to further ease monetary policy through a rate cut as early as June and a possible liquidity injection to recapitalize public sector banks.   
• Current valuations for equity markets are already close to 20x forward earnings – somewhat capping any meaningful upside. However – a clear Modi mandate increases the chances that key economic and market reforms will be implemented – which builds the pathway for India’s longer-term economic growth and translates into revised positive corporate earnings momentum over the next 5 years.  

• This week brings five key events with implications for global markets.
• European parliamentary elections begin this week, and results will be announced from the recent Indian elections.
• In the US, I’ll be watching for clues from the Federal Reserve minutes as well as durable goods and retail earnings reports.
   

• US President Donald Trump’s newest tariffs have gone into effect — a 25% toll on $200 billion of Chinese goods. 
• I remain concerned about the negative impact of tariffs and the potential that China can retaliate against the US in a meaningful way.
• The problem with tariffs is that they tend to disproportionately affect those Americans in lower- and middle-income brackets.
   

• President Trump issued threats of fresh tariffs on Chinese goods over the weekend.
• China typically doesn’t respond well to threats, and its economy has been weathering the trade spat thanks to substantial stimulus.
• US economic data may seem strong, but signs of weakness have appeared as the trade dispute drags on.
   

• Spain’s current governing party won the most votes in the April election, but will need to look outside traditional alliances to form a coalition.
• There is widespread fear that the European parliament will experience major changes and greater polarization in its May elections.
• There continues to be a powerful movement afoot attempting to hold a second referendum on Brexit. 
   

• The strong Chinese Q1 GPD growth has brought a recent shift in the government’s policy focus – with the Politburo indicating last week that the focus will shift to growing the economy through structural reforms rather than economic stimuli.
• Although I remain positive on both the economic growth recovery story in China and the rest of Asia, I foresee investors taking their foot off the gas pedal and taking profit at these levels as current valuations in Asian equities have pretty much discounted most of the good macroeconomic news.

• Recent comments from Federal Open Market Committee members have reinforced the notion that the Federal Reserve doesn’t know where it is going with the direction of rates.
• Despite recent positive economic data, China remains concerned about growth for 2019.
• The European Central Bank is optimistic that economic growth may improve for the eurozone, but acknowledged that other factors could derail that view. 
   

• The recent run-up in Indian equities reflect the market’s expectations of a continuation of the current administration that is pro-business and trade.
• We expect continued upward momentum in Indian risk-assets as the political overhang is removed after the election with a continued Modi-led coalition.  
   

• The FOMC’s recently released meeting minutes lowered market expectations for rate cuts.
• The ECB stayed steady with its ultra-accommodative policy, but will it need to do more as pressures grow? 
• If central banks become more politicized, they may not be able to intervene as effectively in future crises. 
   

• China’s economy has started to show signs of stabilization and even positive momentum in the first quarter of 2019 as the government’s expansionary fiscal and monetary measures start to kick in. More importantly, the economy is no longer hampered by last year’s US trade war fears and the central government’s deleveraging campaign. 
• First quarter GDP is expected to be released next week and there is potential upside to the government’s first quarter and full year guidance.
   

• There were three main observations during my trip to Europe last week: Brexit, the ECB and the eurozone economy.
• It appears that the UK has become a cautionary tale for other countries with antipathy towards the EU. 
• The data implies that much of the eurozone’s current weakness can be attributed to the economic slowdown in China, which appears to be reversing.
   

• In the first quarter, markets signaled optimism about stocks globally, but pessimism about the global economy. 
• Will this dichotomy narrow in April, or split further? There are six issues that may help answer this question. 
• We discuss Brexit, US-China trade talks, and more.

• In the last trading day of the quarter, the CSI 300 roared to a +3.8% close, capping an already impressive +28% first quarter performance, marking it the best performing national equity market in the world and the best performing quarter for the index since 2014.
• The Chinese bond market meanwhile also had an impressive quarter, ahead of next month when Chinese bonds will start being added to the Bloomberg Barclays Global Aggregate Index.

• Fed Chair Jay Powell tried to reassure markets about the US and global economies, but those comments don’t sync with the dramatic change the Fed has made in the last few months. 
• Markets are now far more concerned about the growth outlook, and that’s being reflected in Treasury yields.
• The fall in Treasury yields indicates growing fear.

• It took more than 100 years for a US central bank to be successfully established, and distrust of the institution continues today.
• Instead of attacking central banks, some politicians seek to use and control them.
• In my view, central bank independence is critical to their ability to counteract the economic effects of geopolitical chaos.
   

• Last week was a pivotal one for central banks, continuing a trend begun a few weeks before by the Federal Reserve.
• The ECB’s forward guidance on rates is seen as a reaction to the worsening of the region’s economic backdrop.
• I believe the market reaction to the ECB decision was negative because of the abrupt nature of this change in stance.
   

• The latest FOMC statement was seen as a significant change from its stance in 2018. The impact on Asia is almost entirely favourable. Trade should start to pick up again after the US-China dispute has been settled, enabling smaller East Asian economies to boost their growth rates from their current rather low levels.
• Many investors are concerned about Australia. My view is that until China has a stronger recovery and commodity prices rise, we should expect the AUD to remain weak, and Australian house prices will continue to decline.
•  In Japan, I see no sign that the BOJ is going to change its strategy, and therefore it is unreasonable to expect Japan’s inflation rate to return to the 2% target.  

• We think that the GDP forecast is easily achievable and that the fiscal and monetary stimulus are measured and prudent.
• The report highlighted that monetary policy priority is to enhance transmission and facilitate liquidity to the private sector SMEs and pledged to use pricing instruments to support the economy.
• We continue to remain bullish on the Chinese market and economy.  

• A US-China trade deal is far from a sure thing, but if we get an actual deal, I would expect stocks globally to rise significantly. 
• The Federal Reserve touted its data-dependent approach, which I believe should be positive for the stock market — and business sentiment.
• Markets are watching six events this week, from central bank meetings to key data releases. 

• MSCI just announced an increase of the inclusion factor in large-cap A shares to 20% from 5%. 
• Recent improvements in market accessibility have made it more convenient for foreign investors to invest in A-shares.  
• Valuation right now remains reasonable. We think that the fiscal and monetary stimulus that the PBOC has undertaken recently will bear positive economic benefits in the second to third quarters of 2019. 

• On the surface, last week brought good news for stocks in the form of insight from the Federal Reserve as well as progress in US-China trade talks. 
• However, uncertainties remain about both events.
• Looking ahead, there are some important market dates and events to pay attention to this week.
   

• Despite continued “noise” and near-term turbulence ahead of the election, we expect that the elections will go ahead as planned.
• If the Constitutional Court rules to disband the Thai Raksa Chart party, we expect large-scale disruptive protests by pro-Taksin supporters.     
• The planned Thai elections will be a removal of a key overhang and a positive catalyst for Thai political economy.

• Last week brought disappointing data from several countries.
• In some areas (China), I’m optimistic. In others (the UK), I expect more of the same.
• This week, I expect the FOMC meeting minutes to be the most important event for markets.

• The deadline to avoid another US government shutdown is fast approaching, and I believe markets would take another such closure far more seriously this time.
• I am still hopeful that the US will extend the March 1 deadline for scheduled tariff increases against China.
• The Brexit deadline is getting far too close for comfort, but it appears no real progress has been made.

• Last week, we saw strong indications that the Federal Reserve’s game plan for rising rates and balance sheet normalization may be changing.
• I believe this change in perspective will help to support risk assets going forward.
• I also highlight seven issues to watch this week.

• Last week, experts in Davos warned about the dangers of debt, more signs of a European slowdown emerged, and US government shutdown ended.
• This week, I’m watching eight issues that could move global markets. 
• These include the Federal Reserve, another Brexit vote, and much more.

• As we near March 29, odds are increasing that the UK will either crash out of the EU or remain in it.
• While stocks in the US have shrugged off the shutdown, a credit downgrade could change that.
• While politicians contend with these issues, the International Monetary Fund has lowered its expectations for economic growth.
   

• Despite Brexit uncertainty, the US government shutdown and French unrest, investor sentiment was positive last week.
• I believe markets are focused on just two issues — the US-China trade war and Federal Reserve tightening.
• The news flow on those two topics is likely to dictate stock market performance, in my view. 

Key takeaways:

• 2018 saw a re-pricing of some parts of the bond market, which has created some value.
• Fundamentals within the banking sector generally remain good heading into 2019.
• Challenges remain that could see further volatility and potential investment opportunities during 2019.

Key takeaways:

• Headlines have dominated negative sentiment – it is important to take a more fundamental long-term approach to European equities.
• Domestic demand continues to drive the European economy.
• Valuations are attractive in many sectors.

Key takeaways:

• We take a two- to three-year view of the world when building our central economic thesis.
• We believe it is vital to consider both cyclical and structural forces in building this thesis.
• We must believe that all of our ideas can make a positive return in our central economic scenario to ensure we have ideas that can excel in various economic conditions. However, it is important to note that our ideas do not derive from it.

Key takeaways:

• The overvaluation of structural growth stocks, such as technology stocks, is unsustainable, in our view.
• For markets used to easy money, the transition to a more ‘normal’ period for central banks is likely to pose a challenge.
• The European market looks a lot more attractively valued than the US, especially those stocks more sensitive to the direction of the economy, such as banks.

Key takeaways:

• Headlines have dominated negative sentiment – it is important to take a more fundamental long-term approach to European equities.
• Domestic demand continues to drive the European economy.
• Valuations are attractive in many sectors.

Key takeaways:

• Equity markets have been negatively impacted by global trade war concerns, and investors are also worried about the prospects of slowing economic growth given tighter monetary conditions.
• In particular, opportunities exist in select cyclical sectors as many are discounting a sizable economic slowdown commensurate with a recession.
• In our view, historically low volatility sectors are expensive, and in some cases structurally challenged versus history.

Key takeaways:

• Equity markets have been negatively impacted by global trade war concerns, and investors are also worried about the prospects of slowing economic growth given tighter monetary conditions.
• In particular, opportunities exist in select cyclical sectors as many are discounting a sizable economic slowdown commensurate with a recession.
• In our view, historically low volatility sectors are expensive, and in some cases structurally challenged versus history.

Key takeaways:

• The road ahead is expected to be challenging due to a variety of factors: rising global interest rates; increased volatility; diverging global monetary policies; and heightened geopolitical tensions around trade and tariffs.
• Our forecasts for returns are tepid across the major asset classes.
• There remain pockets of opportunities within asset classes.

Key takeaways:

• Risks today are crystallizing; many are more global in nature.
• Pricing remains attractive; however, yield/cap rate compression is largely behind us.
• Total returns in 2019 are likely to be driven by net operating income growth.

Key takeaways:

• Despite the soft patch in certain macro indicators, there is a broad expectation that most major regions may deliver solid earnings growth in 2019.
• We believe equity valuations remain vulnerable to higher bond yields and discount rates, particularly among the technology names.
• Trade and geopolitical tensions are the primary threats to the growth outlook.

• In the waning days of 2018, disruption is refusing to take a holiday, with concerning headlines from China, the UK and France.
• In the US, there is the potential for a partial US government shutdown looming later this week.
• Looking ahead, the US Federal Reserve promises to make news with its meeting this week.

Key takeaways:

• We see new risks on the horizon for both equity and fixed income investors, but there are various exchange-traded fund strategies that we believe can help.
• We expect that a loss of profit momentum in 2019 could lead to increased volatility and correlations, and we believe that the Low Volatility and Quality factors may perform relatively well in such an environment.
• With the overall climate still tilting in the direction of higher rates in 2019, one way to potentially manage that risk is to build bond ladders using defined-maturity bond funds.

• As of this writing, the sell-off has been continuing, and it’s possible stocks could move lower from here.
• However, I was a lot more worried about the stock market in August and September than I am now.
• I see this sell-off as an opportunity for investors to begin writing a “wish list” of investments they would like to add to their portfolios.

Key takeaways:

• 2018 has been a year of turmoil, but, 2019 promises to be much calmer, in my view.
• I believe the Federal Reserve should be successful in positioning the US economy for several more years of expansion.
• Monetary policy invariably dominates fiscal policy in the determination of inflation.

Key takeaways:

• We believe Chinese equities represent some of the best structural opportunities across global markets.
• Following the correction in 2018, we believe the risk-reward picture has turned exceptionally favorable.
• We believe corporate fundamentals will remain strong given solid support from the domestic market.

Key takeaways:

• In the US, we believe peak levels of growth are behind us and expect to see slowing in the second half of 2019.
• Outside the US, there are also signs of softening growth.
• Inflation is likely to increase somewhat, but we do not believe that wage inflation will be significantly passed through to consumer prices in 2019.

Key takeaways:

• We believe economic growth divergence is likely to continue to some extent.
• Geopolitical disruption is leading to structural fragmentation.
• The debt problem is widespread and is becoming more burden some as rates rise.

Key takeaways:

• We believe Asian markets may regain favor from international investors in 2019.
• Regional governments are expected to roll out pro-growth policies to support domestic economies.
• Asian companies are looking for opportunities to expand abroad, which represents an important change in mindset.

We expect continued volatility as markets overreact to positive and negative news

• For the last several weeks, I have written in my blog that signs of a global slowdown are starting to appear. 
• The good news is that policymakers appear to be reacting to those early signs. 
• I believe this could help spur a “Santa Pause” rally for markets.

• Hints of an economic slowdown are appearing.
• The conventional assumption is that enough bad data will mean looser monetary policy.
• However, I believe central banks are more likely to be a risk factor going forward.
   

• Last week, Fed Chair Jay Powell noted he is seeing “concerning” signs of a global slowdown — but the good news is the Fed looks poised to respond.
• Declining GDP and increasing inflation in the eurozone could pose problems for the future of European Central Bank normalization.
• Based on this past weekend’s Asia-Pacific Economic Cooperation meeting, I expect the trade situation between the US and China to deteriorate. 
   

• In the US, I believe there is significant potential for upside — that’s because there are a few agenda items that the president and Democrats agree on.
• In China, sales results from the Singles Day retail holiday are a reminder of the resilience of the Chinese economy.
• I also believe that Italy and the EU will ultimately reach a compromise, but there may be more volatility before then.
• It has been reported that Reserve Bank of India Governor Urjit Patel may resign at the bank’s next meeting on Nov. 19. 

Assessing the impact of the US midterm elections on four key areas

• The results of the US midterms have had an initially supportive effect on US markets.
• Beyond this initial market response, we think there are important implications to explore for global markets, for various US equity sectors and for major macro themes.
• In this commentary, we examine four key areas: US politics, fiscal/monetary policy, domestic policy and foreign economic policy.

• Last week brought more inaction on Brexit, pessimism on trade, and a rise in US wage growth.
• This week, all eyes are on the US midterm election, and which party will take, or keep, control of Congress.
• Short-term volatility is likely, but what about the long term?
   

• Once again, the month of October has been living up to its frightful reputation for wreaking havoc on stock prices.
• Earnings reports and recent economic data have been largely positive. But I believe markets are looking beyond the third quarter, and that may be one reason for the downward volatility.
• I don’t believe the episodic downdrafts in stock prices will end until after the November mid-term elections in the US.
   

On the Asian side the observable results in the published data are very small to non-existent, but the PMI measure for new export orders – an indicator of future trade volumes -- fell to its lowest level in two years.

For the second time in two weeks, global markets suffered a significant drop. Why? And what could come next?

• The US delivers yet another weapon in its trade war with China — one that makes it much more difficult for Chinese businesses to sell smaller items direct to US consumers. 
• And yet Chinese stocks have rallied at the start of this week on strong words of support from President Xi, similar to Mario Draghi’s statement of support for the euro in 2012.
• A trade agreement between the EU and the US will not be easy; it is far from a “done deal.”
   

• There were two catalysts for last week’s stock market drop — US Federal Reserve (Fed) normalization and trade.
• These risks have been growing for some time, and so I don’t expect them to go away overnight. Therefore I don’t believe the sell-off is over, although I expect it to be relatively short-lived.
• Beyond the sell-off, there are four key issues in the coming week that we will need to watch.
   

Yesterday, US stocks plunged in a tech-fueled rout. I examine why we may be in a ‘perfect storm’ for market disruption.
Markets have managed to shake off worries about protectionism and Fed normalization — until yesterday. Is this the start of another February-type sell-off?

• In the US, I think the odds are very good that the USMCA trade agreement will be ratified, even if the House were to switch to a Democratic majority after the November mid-term elections. 
• In Brazil, I believe the markets will clearly prefer Jair Bolsonaro in the two-way run off for president.
• In China, the economy has been slowing modestly, but I believe it is a mistaken assumption to believe that this means China will capitulate to the US in a trade war.

• After increasing rates last week, I believe the US Federal Reserve remains undecided about a rate hike in December.
• I expect the US-China trade war to heat up and create more of an impact in the economic data.
• Attention is turning to what could happen to companies if a no-deal Brexit takes place next March.
• Markets may react positively for days to the NAFTA deal, but I believe this is part of an asymmetric reaction to trade developments: Positive developments have caused rallies, while negative developments have barely made a dent in stock prices.

• Last week brought bad news on trade and Brexit, yet stocks globally shrugged off the news and rose higher.
• Additionally, the yield on the 10-year Treasury bond surpassed the key 3% level.
• I discuss the various factors behind these trends.

Key takeaways:

• We share concerns that the emerging-market sell-off elsewhere may also impact Asia, but believe investors have overlooked areas that support the long-term strong performance of Asian equities
• We believe investors will soon find bargains in the region given the valuation discount
• In terms of the most exciting opportunities in the region, we believe China all-share investing is the way forward

• Japan’s Sept. 20 election has important implications for foreign policy and perhaps trade.
• In Brazil, voters may be poised to take another step away from globalization. 
• While Americans will not be electing a president in November, their decisions at the voting booth have the potential to impact the current administration.

• I firmly believe the trade situation poses a significant risk to the economy and markets.
• In my view, investors should understand the potential for the trade situation to worsen. 
• In addition, I worry that the US’ trade policies and sanctions policies will ultimately cause countries to seek out another reserve currency - one that comes with fewer strings attached.

Chief Economist John Greenwood analyzes whether East Asia is at risk from the ills of the current crises in Argentina, Turkey and Venezuela.

• All in all, I expect the trade situation to get worse before it gets better. And that may impact the economy and markets in a variety of ways.
• I expect risk premia to rise for Italian sovereign debt in September.
• In emerging markets, Turkey and Argentina have been coming under particular pressure, but the entire region may be painted with the same brush.

• A Fed rate hike in September seems to be in the cards, but there is also continued concern about the impact of trade wars on the US economy.

• It’s rumored that Germany will not nominate Bundesbank Governor Jens Weidmann, widely regarded as a monetary hawk, to replace Mario Draghi next fall as ECB president.

• US stocks set a record. But in my view, we can’t let the euphoria over stocks overshadow what the bond market may be telling us.

• I believe it is unlikely that the crisis in Turkey will end soon, given the Turkish government’s unwillingness to take the measures necessary to resolve it. 
• The US and China will meet again to discuss trade, but I don’t expect any accomplishments to come out of the talks. 
• At the upcoming Jackson Hole symposium, I am most interested to hear Fed Chair Jay Powell speak. I am hopeful he will discuss balance sheet normalization, given that it has created liquidity issues for emerging markets.

Activity in currency markets has more than tripled in the last two decades. Between 2001 and 2016, global turnover in currency markets rose from $1.2 trillion to $5.1 trillion,¹ and the geopolitical disruption of the last two years has increased currency activity even further. Last week brought several significant examples of this trend in the UK, China, Iran and — most dramatically — Turkey. Is this a sign of more disruption to come?

The biggest potential impact is on the economies of Taiwan, Korea and Malaysia. These economies sell goods to China that are used to make products exported to the United States, from automobiles to consumer electronics. Tech components such as computer chips are among the products most vulnerable to a trade war.
US consumers may struggle to find sufficient substitutes to replace the goods that they currently buy from China, at least in the short-term. What's more, to the degree other Asian economies may be able to offer substitutes for Chinese products to the US market, some Asian exporters could benefit from any switch in US demand away from Chinese products.

Several critical issues are heating up this summer, including trade and Brexit

As central banks normalize, market liquidity is coming under pressure

While markets may be rattled in the short term, recent uncertainties will not stifle the current business cycle upswing

Concern grows about the impact of tariffs on the global economy

Global summits and key data releases top the list of what to watch

Examining trade tensions, job reports and the concerns of the Federal Reserve

Administrations and corporations continue to respond to Trump’s tariff plans

Five trends to watch for during the remainder of 2018

Many major banks are tightening, but trade threatens to disrupt economic progress

Interest rate decisions are also in the spotlight

New US tariffs may have a long-reaching impact on the global economy

Italy’s election chaos has roiled the media, but the market reaction has been contained.

A strong USD has historically been negative for EM currencies, especially commodity producers. This is a price effect that will hurt higher cost EM economies, and benefit only those that are price-competitive, which includes some Asian manufacturers. However, provided that the US economy continues to grow (i.e. this is only a rise in US rates and not a downturn in US economic growth), then Asian manufacturing exporters should continue to benefit from volume growth.

There are several reasons why high oil prices may pressure stocks

Examining the Brexit transition, Italy’s coalition and the Iran nuclear accord

While it may be set to shape the future, the Belt and Road Initiative (Belt and Road) is already changing the world today. Mega projects are underway in Asia, Europe and Africa, generating an influx of fixed investment and creating early efficiency gains.

2017 has seen Asian equity markets rally largely due to the strength of corporate earnings. At the start of the year, earnings growth expectations for 2017 were low at approximately 10%, but over the course of the year they have been revised up to 20%. The recovery has been helped by a combination of factors such as: solid global economic expansion, a lack of disruption from President Trump, falling bond yields in some Asian markets and a small earnings rerating.

2017 was a positive year for the economy and capital markets. The global economy grew at a faster pace than in 2016, and risk assets also rose significantly. However, investors are wondering whether the current environment will continue through 2018. Following are my 10 key expectations for the new year:

When we think about our outlook for 2018, we look for themes that can help us reduce risk and boost return potential — and we’re always on the lookout for blind spots that can pose an unexpected threat. The foundation of our process is the development of capital market assumptions — long-term forecasts for the behavior of different asset classes. Our expectations for returns, volatility and correlation serve as guidelines for our long-term, strategic asset allocation decisions. 

Bond markets have been in a sweet spot in recent years. Economic growth has been positive, inflation has been relatively benign, volatility and default rates have been low, central bank policy has been accommodative and the demand for income has been high. One of the biggest challenges we as fixed interest investors now face is what happens when one of the central pillars of this supportive environment — the still huge amount of central bank stimulus — is reduced.

Despite what has been an incredibly tumultuous, unpredictable and at times unimaginable period for global politics and an initially spluttering return to global growth, central banks appear to have successfully steered markets through the worst, ironing out the kinks and at times acting together to present a semblance of global harmony. Sometimes, markets have appeared to simply ignore events that in less interesting times would have caused a rout. Somehow though, it still doesn’t feel that the aftermath of the financial crisis is fully behind us, nearly 10 years on, and we believe it is vital to consider both cyclical and structural forces in building our economic and market outlook.

We approach the new year with confidence that the world’s leading economies will continue to display strength and resilience. The US economy is likely to lead from the front, aided by a gathering upturn in the Eurozone and the start of a renewed upswing in global trade. The likely expansion among developed economies should also have a positive impact on the export-oriented, manufacturing economies of East Asia as well as commodity producers in other emerging nations.

The global economy continues its synchronised recovery, as evidenced by robust data across regions. Indeed, all 45 countries tracked by the Organisation for Economic Co-operation are expected to post positive economic growth in 2017 for the first time in 10 years. Even more optimistically, 33 out of 45 countries are seeing accelerating growth. This has boosted international trade and commodity prices, and helped make the global expansion story gradually more self-sustaining. On this basis alone, the prospects for 2018 look positive, with broadbased improvements across the major developed economies and a number of emerging market economies expected to continue.

Europe is a rich, highly developed part of the world which is home to a vast range of companies. However, on occasion it still seems to struggle to attract attention from serious investors around the world. There’s always a handy excuse: “Why bother when it’s only a play on more interesting parts of the world?” or “There’s never any earnings growth, is there?” or “Don’t the politics make it un-investable?” Wrong.

Chinese equities caught investors by surprise in 2017 with a strong rally. Contrary to the pessimism over the past few years, investors have turned upbeat toward China, and for good reason: Economic data in general exceeded expectations, and we have seen broad-based earnings growth.

2017 has been a good year for Asian equities so far, rising 36% and outperforming the rest of the world.¹ The strong performance has been supported by steady economic conditions and robust corporate earnings. Yet still, Asia is trading at its lowest price-to-book ratio relative to the S&P 500 Index in 15 years.²

China has adopted varying policies to maintain the economic momentum and keep everything stable ahead of the 19th National Congress of the Communist Party — sometimes tightening, sometimes easing.

The Trump “reflation rally” that drove equity markets across the developed and emerging world in the four months after the US election has continued but it is more due to the underlying expansion of the US business cycle than to any Trump effect.

The central bank also surprises markets with a plan for balance sheet unwinding

A ‘softer’ Brexit looks more likely as the Conservative Party loses power and forms a coalition government.

Market-friendly centrist reformer Emmanuel Macron will face far anti-European right-winger Marine Le Pen. Opinion polls have consistently pointed towards something like a 60-64%: 36-40% vote in Macron’s favour. A Macron presidency should also be a lot easier for the Germans to work with constructively.

With key European elections ahead, post-Brexit relationships remain unclear.

The US Federal Reserve (the Fed) hiked its benchmark short-term interest rate by 25 basis points, as expected. The statement was generally neutral, in our view, with upbeat commentary around the current growth backdrop.

This past year has been marked by a series of macro events that helped shape a dynamic, challenging market environment. The UK’s vote to withdraw from the European Union, oil price volatility, a contentious presidential election in the US and slowing growth in China all contributed to major market moves.

Italians voted Sunday, Dec. 4, to reject changes to their constitution, leading to the resignation of Prime Minister Matteo Renzi and marking a victory for the country’s populist movement. Polls had suggested that Italian voters would reject the referendum on constitutional amendments to reform the Senate by a margin of about 10%. The turnout at 70% and margin of victory at 18% were both higher than expected.

Two elections in one weekend are more than enough for any fund manager to cope with, the results coming out of Vienna and Rome being very different.

Following the UK’s historic decision to leave the European Union (EU), we share the views from across our economic and investment teams as to how this result might shape their thinking and the investment landscape going forward.

Given current market sentiment it is perhaps not surprising that MSCI erred on the side of caution and earlier in the week made the decision not to include China A-shares in its Emerging Markets index. However, we believe a small percentage of inclusion, such as 5%, is highly possible in the next year or two.

Whether or not MSCI adds China A-shares to the MSCI Emerging Markets index as part of their next round of updates in June, we believe that implementation of a gradual inclusion process is only a matter of time given China’s central role in the emerging markets.

At the start of the year, the MSCI Asia ex-Japan index lost as much as 12.9%1 before rebounding to recoup those losses by the end of the first quarter. What drove markets lower were global investors’ fears about three issues: 1) the slowdown in China, 2) the potential repercussions of further US policy tightening and 3) rising deflationary pressures driven by weak commodity prices.

At the start of the year, the MSCI Asia ex-Japan index lost as much as 12.9%1 before rebounding to recoup those losses by the end of the first quarter. What drove markets lower were global investors’ fears about three issues: 1) the slowdown in China, 2) the potential repercussions of further US policy tightening and 3) rising deflationary pressures driven by weak commodity prices.

The Korean corporate landscape is gradually changing, with the emergence of more independent businesses, on the back of the diminishing importance of the ‘chaebols’. In our view, this is an important development for the Korean economy and market.

The Bank of Japan (BoJ) has now been conducting quantitative easing (QE) for just over three years, while the European Central Bank (ECB) has been conducting QE for just over one year.

The above materials have been prepared only for those persons to whom Invesco has provided it for informational purposes only. It is not an offering of a financial product and is not intended for and should not be distributed to retail clients who are resident in jurisdiction where its distribution is not authorized or is unlawful. Circulation, disclosure, or dissemination of all or any part of the above materials to any person without the consent of Invesco is prohibited.

The above materials may contain statements that are not purely historical in nature but are "forward-looking statements," which are based on certain assumptions of future events. Forward-looking statements are based on information available on the date hereof, and Invesco does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially different or worse than those presented.

The information in the above materials has been prepared without taking into account any investor’s investment objectives, financial situation or particular needs.  Before acting on the information the investor should consider its appropriateness having regard to their investment objectives, financial situation and needs.

You should note that this information:

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All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed.  Investment involves risk.  Please review all financial material carefully before investing. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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