The dominant global theme in June has been the increase in rhetoric from central banks – other than the US Federal Reserve – suggesting the day is nearing when emergency policy stimulus will need to be unwound. Global bond yields rose as a result, while the US dollar weakened. ECB President Mario Draghi suggested that deflationary forces have been replaced by reflationary ones. The Bank of England and the Bank of Canada also hinted at policy tightening. Monetary policy normalisation across the world is a healthy development, as recent economic data suggest “emergency” policy settings are clearly no longer needed. The Bank of International Settlements said policymakers should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the unwinding of quantitative easing programs and record low interest rates.
Global growth expectations are on the rise and there may be room for more upside surprises. Reflation is becoming synchronised, with non-US economies contributing as much as the US to growth expectations. This marks a reversal from 2016, when the US was the locomotive. The global economic recovery is broadening and there is room for growth forecasts to ratchet higher as reflation gains traction. While some of the enthusiasm over Mr Trump’s policies might have waned, real hard data is likely to accelerate. The five structural headwinds to global growth over the past four years are diminishing – fiscal tightening, the euro crisis, bank deleveraging, the decline in BRIC growth and the collapse in commodity prices, and US and euro area GDP growth may accelerate. The three locomotives of global growth; US, China and Europe, are for the first time since the financial crisis, all contributing to global economic growth. Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes.
Politics remain a key focus for markets, but the latest developments in Europe are positive. In France, the first round of the presidential election ruled out the least market-friendly outcome, and although eurosceptic Marine Le Pen is in the run-off as expected, polls suggest reformist Macron should win. The snap election called in Britain for June is a material positive game-changer for Brexit negotiations. Beyond politics, focus has been on fading conviction in so-called Trump trades – higher inflation expectations and interest rates and buoyant risk assets – following speed bumps on the US domestic agenda and increased geopolitical tension.
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