Macro: A year in two stages

Thursday 07 February 2019

Cross Asset

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Contributing Authors

Didier Borowski
Head of Macroeconomic Research,

Monica Defend
Head of Strategy, Deputy Head of Research,

Philippe Ithurbide
Global Head of Research,

The slowdown in world trade is likely the result of uncertainty over trade between the US and China. The global uncertainty index reached its highest level in December. The previous peak was just after Donald Trump’s election. The sharp trade tensions between the two countries are a key source of uncertainty. It is indeed in the US and in China that it has increased most significantly over the recent period. An increase in uncertainty tends to weigh on the trade of many countries through a slowdown in investment and disruption of production chains.

That being said, the US and China concluded a truce on December 1 that both parties have every interest in respecting, given the darkening economic outlook.

Since then, the Chinese authorities have sent conciliatory signals. Donald Trump has now interest in finding a compromise given the clouds that accumulate on the US economy (end of fiscal stimulus in sight, tightening in financial conditions, impact of a shutdown that does not seem ready to end). Under these conditions, a destabilisation of world trade could end up weighing heavily on the US economy. It is noteworthy that world trade has been experiencing over the past years minicycles (short periods of acceleration or deceleration) which temporarily give the illusion of a synchronised global economic cycle. The last episode dates from 2017, when world trade rebounded. The year 2018 began with the theme of a synchronised global recovery that did not last long. The strength of global trade led economists to be overly optimistic (especially in Europe, where growth forecasts were revised up sharply). Today the slowdown in world trade is likely to lead to an error of the same type but in the other direction. Subject to China and the US continuing to settle their dispute through negotiation, growth in world trade is expected to stabilise by mid-2019 to a level close to that of world GDP (3.5%). Economies are not at the same stage of their cycle. Considering the determinants of domestic demand, we expect advanced and emerging countries to decouple in the second half of the year, with the continuing slowdown in advanced economies (especially in the US) and a stabilisation or even re-acceleration of growth in emerging countries.

The Strategist View

Main changes since November outlook

A few changes have occurred in the macro-financial environment in the last three months. Economic growth slowed globally, trade disputes translated into weaker world trade growth. Financial conditions tightened sharply, US Treasury yields experienced positive flows based on a flight to quality (moving down 50 bps since October 2018).

Furthermore, we adjusted our Fed forecast (one hike in 2019, depending on economic data) and revised our US Treasury yield accordingly (10Y T Bond at 2.9% end-2019). In the euro area, we now see no rates hike in 2019 and revised the 10Y Bund to 0.35% by end-2019.

We also revised downward our EPS growth expectations: fundamentals remain slightly above trend in the US (6.7% in 2019), but this last leg of late-cycle dynamics could see some headwinds that go beyond margins and relate to revenue generation in the future. This will result in an eroding of our sales projections (manufacturing and wholesale, while retail continues to be supported by solid consumption). The reporting season will shed some light on top-line guidance.

In terms of investment consequences, the combination of more patient and flexible monetary policy stances, encouraging tariff negotiations, and economic intervention of Chinese authority could positively affect risk assets (and represent risks should they fail to materialise) and might help for a positive reaction after the brutal valuation reset. However, our broad set of risk sentinels (liquidity, credit spreads, earnings) keep us vigilant and aware of medium-term risks. Concretely, this translates into a positive bias towards risk assets and a flexible duration management in fixed income.

Important Information

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of February 1, 2019.

The views expressed regarding market and economic trends are those of the authors and not necessarily Amundi Pioneer, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.
This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service.

Date of First Use: February 1, 2019.