Since the first Macro Quarterly* was published in late September, investors in risk assets have endured a chastening few months. Even with the benefit of hindsight, it is not easy to pinpoint precisely the catalysts for the shift in investor sentiment that first prompted double-digit drawdowns across global equity markets in October.
Whatever those original catalysts were, the principal drivers of investor sentiment have evolved. From the highs of early October, 10-year US Treasury yields have retraced 40 basis points with a flattening yield curve prompting plenty of investor comment and concern. Hawkish rhetoric from US Federal Reserve officials has turned notably more dovish, at least for now. Even the combative rhetoric between US and China over trade morphed, at least temporarily, into something approaching conciliatory at the G20 summit in Buenos Aires. Yet markets remain volatile.
But after a period of sharp US growth outperformance, our view is that global economic growth drivers have the potential to at least partly resynchronize in 2019. Our expectation is that both European and Japanese industrial production will recover after material one-off drags in 2018, that the impact of China’s stimulus measures will kick in and that the boost to the US economy from fiscal stimulus will fade.
While the partial resynchronization of global growth drivers may temper to a degree the recent rise in volatility, overall we see the continued normalization of monetary policy and the gradual tightening of liquidity conditions as more powerful drivers over the medium term. Higher volatility is likely to be around for a while. In our view, the outlook for equities going into 2019 is positive, but the road is likely to remain bumpy.