1. Halftime score
The first half of the year is drawing to a close, and it’s safe to say it has been an eventful six months. On the political front, Donald Trump was sworn in as US president, Emmanuel Macron swept to victory in France’s presidential election, and Britain’s general election delivered an equally surprising hung parliament. In markets, the global reflation trade that was supposed to accelerate the switch out of safe-haven assets such as bonds into risky assets like stocks unraveled.
The Fed raised rates twice, but traders doubt Yellen and Co. will do much more. US, UK, German and world stocks are at record highs, volatility at historic lows and the corporate earnings growth outlook is holding up well. But yield curves are the flattest since before the US election last year, oil is down 20% in just two months, and inflation expectations around the world are falling. The next six months promise to be equally eventful, and it would be a brave person to predict with any certainty which way markets will go.
2. Inflation vacation
Central bankers head to the Portuguese resort town of Sintra next week with oil prices, inflation expectations and bond yields also on a retreat. The outlook for global growth has improved significantly since representatives of the European Central Bank, the US Federal Reserve, the Bank of Japan and the Bank of England met a year ago, but the elephant in the room remains inflation. The Fed is plowing on with rate rises regardless, but markets are starting to rethink how fast and how far it can go in this hiking cycle. The ECB has to start tapering soon as it runs out of bonds to buy, but is sticking to a cautious line. Even the Bank of Japan is trying to convince people it has a credible exit strategy without giving too much away. The Bank of England has an altogether different problem with inflation. Despite the economic shock of its impending divorce from the European Union, some of its cohort are calling for a hike in rates to stem sharply rising inflation born out of a drop in the pound.
3. Oil’s not well
The only sector playing spoilsport in this year’s cheery global rally across stocks is energy. Down 11% so far this year and dragged lower by the slide in oil, energy stocks are significant laggards and the only major sector in the red for the year. Global shares, as measured by the MSCI AC World index are up nearly 11% this year, while the top performer – tech – is up more than 22%. The weakness in oil has implications for global inflation expectations and, more importantly for asset prices, on the path for central banks’ normalization of monetary policy. Stubbornly low inflation will put further pressure on already-flagging reflation trades and in the past week investors appear to have begun shifting allocations accordingly.
4. Ball of confusion
The fallout of the past week’s shift in Bank of England policymakers’ voting intentions is unlikely to fade anytime soon. Whatever the details of the mixed messages coming from Governor Carney and chief economist Andy Haldane this week, Haldane and the others have taken a major step that has markets speculating on a rise in interest rates within the next six months and sterling stabilizing as a result. What if the market decides it simply doesn’t believe a hike is plausible? The latest of a round of surveys on sentiment among British business and consumers over the next week are not likely to show an economy primed for higher interest payments. And then there is the question of whether Prime Minister Theresa May can win next Thursday’s vote on her government’s program. If not, another election could follow and the pound could be back in the firing line.
5. Just how radical?
Members of South Africa’s ruling African National Congress (ANC) will gather on June 30 to kick off their National Policy Conference, aimed at reviewing past policies and sketching out the way forward. Expected to take center stage is the “Radical Economic Transformation” plan. President Jacob Zuma has pledged to redistribute wealth in the economy – still largely held by a white minority – to poor black people. But with few concrete policies on how this will be achieved, Zuma has been criticized by his opponents for beating the populist drum. Questions over Zuma’s stewardship have intensified since Africa’s most industrialized economy fell into recession, saw its credit rating downgraded and has been rocked by political turmoil – and more recently a row over the independence of its central bank. Zuma – who may also face a motion of no confidence – has been facing mounting calls to resign ahead of a December meeting where his successor as party leader will be chosen. And onlookers expect economic policy discussions may just take a backseat to succession politics this week.