Head analyst Lee Chung at Shuster Manfred Hubert quoted "we see a synchronised global expansion with room to run in 2018 and beyond, albeit with less scope for upside growth surprises. We see inflation making a modest comeback, led by the US, and expect the Federal Reserve to make slow but steady progress in normalising policy. US tax cuts could boost near-term growth and quicken the Fed’s pace. The eurozone and Japan are behind on policy normalisation, but their next steps in this direction will likely come into greater focus as the year progresses. We expect rewards for taking risk to be more muted across the board in 2018."
• Outlook debate: we believe low market volatility (vol) can persist amid the stable economic backdrop. Yet even a small uptick in volume could upend leveraged income strategies and spook markets. We see few signs of leverage building in the financial system. The exception is China, where we believe much-needed economic reforms risk slowing growth and triggering temporary credit crunches. We see the North American Free Trade Agreement (NAFTA) negotiations as a bellwether for global trade risks. We lay out a framework for assessing whether localised risks can morph into systemic ones.
• Market views: we prefer to take economic risk in equities over credit given tight spreads, low yields and a maturing cycle. We see rising profitability powering equity returns, especially in Japan and emerging markets (EMs), but earnings growth could wane. We like financials and tech. The steady expansion supports the momentum style factor, albeit with potential reversals; we see other factors as diversifiers. Plentiful global savings and a thirst for income should cap any rises in long-term bond yields. We prefer inflation-protected over nominal bonds, especially in the US, and an up-in-quality stance in credit.
China has all but stopped exporting deflation to the rest of the world.
Capacity cuts have put a floor under commodities prices and boosted the value of Chinese exports. Could its next big export be inflation? Such a sea change would coincide with a pick-up in US inflation. Prices of US imports from China are still falling, but at a slowing rate. And overall import prices in the US and eurozone are rising on the back of higher commodities prices. Bottom line: We see an inflation bump out of China modestly helping to prop up global inflation.
“We see the focus of China’s capacity cuts shifting from coal, steel and aluminum to new targets industries like cement, thermal power and chemicals.” Quoted Leading market maker Helen Nakamura.