Germany, Trump and Bank of England bluffs
As September drew to a close, it was something of a relief that much of what could have gone wrong, did not. The global economic recovery has made consistent progress, with the eurozone in particular coming up strongly and taking over the western growth leadership baton from the US.
The same cannot be said about capital markets – and politics. Investment returns have, despite stronger economic data and corporate profit growth, only very slightly moved beyond the healthy levels already achieved at the end of May. This ‘market breather’ was what we had anticipated and, on the back of the strengthening macro-economic outlook, we would normally look optimistically to the rest of the year.
But this is not a normal year, both in political terms and now also in terms of natural disasters. In purely economic terms, for wealthy countries like the US natural disasters create data fuzziness, as they first slow down activity levels in the affected regions, before rebuilding supercharges them further down the line.
Politics and geopolitics are less predictable. President Donald Trump remains the wildest of political wildcards, but given how little he has been able to achieve thus far, and how much public support he has lost in the process, fears of global trade wars have greatly reduced.
The same cannot be said about geopolitical tensions and here Trump remains an uncertainty accelerator. Kim Jong-Un’s ambitions to have North Korea recognised as a nuclear arms power cast a shadow on the short to medium-term global outlook. The surprising rally in bond markets earlier in the month revealed the more cautious part of the capital markets is beginning to take the threat of a thermo-nuclear conflict seriously.
There is plenty ahead to keep capital markets in suspense, not least the upcoming quarterly corporate earnings announcements and the central banks’ determination to bring the era of extraordinary monetary easing to a gradual end.
