Global Macroeconomic & Market Outlook Volatility Strikes Back! Neil Michael Chief Investment Strategist May 2018 Private & Confidential Crown Agents Macroeconomic & Market Outlook
Table of Contents Volatility Strikes Back 3 5 Inflation Risk 12 Recession Risk End of QE Risk 17 Global Trade War Risk 22 Brexit Risk 25 29 Political & Policy Risk 31 Global Debt Risk Market Outlook 34 Private & Confidential Crown Agents Macroeconomic & Market Outlook 1
Macro Outlook Private & Confidential Crown Agents Macroeconomic & Market Outlook
Volatility Strikes Back S&P 500 Equity Volatility Index & UST 10 Year Bond Volatility Index Source: Bloomberg. Data from Jan 2003 to 25 Apr 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 3
Main Risks to the Global Economy 1. Inflation Risk 2. Recession Risk 3. End of QE Risk 4. Global Trade War Risk 5. Brexit Risk 6. Political Risk 7. Global Debt Risk Private & Confidential Crown Agents Macroeconomic & Market Outlook 4
Inflation Risk Private & Confidential Crown Agents Macroeconomic & Market Outlook
The Phillips Curve is Dead – Long Live the Phillips Curve US Unemployment, Average Hourly Earnings & Core Inflation Source: Bloomberg. Data from May 2007 to Mar 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 6
US Business & Consumer Confidence is Still Buoyant US Business & Consumer Confidence Source: Bloomberg. Data from Apr 2015 to Mar 2018. PMIs: Above 50 = Economic Expansion; Below 50 = Economic Contraction. Private & Confidential Crown Agents Macroeconomic & Market Outlook 7
Economic Boost from US Fiscal Stimulus Growth Effect of US Fiscal Stimulus - GDP Growth &YoY Private & Confidential Crown Agents Macroeconomic & Market Outlook 8
Rising Oil Price is Inflationary GDP Weighted Ave DM Inflation Rate vs Oil Price %YoY Source: Bloomberg. Data from Dec 2000 to Feb/Mar 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 9
Marginalised Workers Could Return to the Labour Market US Labour Force Participation Rate % Source: Bloomberg. Data from Mar 1948 to Feb 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 10
Global Inflationary Pressures Mixed But Rising Global Unemployment Rates % Global Output Gaps % Source: Bloomberg. Data from Sep 2002 to Feb/Mar 2018. Source: Bloomberg. IMF. Private & Confidential Crown Agents Macroeconomic & Market Outlook 11
Recession Risk Private & Confidential Crown Agents Macroeconomic & Market Outlook
Signs of Global Economic Moderation – Pause For Breath? DM & EM Composite PMIs Eurozone Manufacturing Supplier Delivery Times Source: Bloomberg. Data from Apr 2015 to Mar 2018. Source: Charles Schwab, Bloomberg data as of 3/30/2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 13
Signs of Economic Moderation in the US US Retail Sales & Savings US Total Bank Credit & Fed Funds Rate Source: Bloomberg. Data from Dec 2000 to Feb 2018. Source: Bloomberg. Federal Reserve. Data from Jun 1994 to Feb/Mar 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 14
Federal Reserve Has Steepened the Path of Expected Interest Rates Senior Loan Officers – Net % Tightening Lending Federal Reserve Dot Plot Standards vs US Libor Spread Source: Bloomberg. Federal Reserve. Data from Dec 2001 to Feb/Mar 2018. Source: Bloomberg. Federal Reserve. Private & Confidential Crown Agents Macroeconomic & Market Outlook 15
Yield Curve is a Good Predictor of Recessions & Volatility US Yield Curve & Output Gap, & the Oil Price US Yield Curve & S&P 500 VIX Volatility Index Source: Bloomberg. Data from Dec 1990 to Apr/Dec 2018 (Est). Source: Bloomberg. Data from Jan 1990 to Mar 2018/Dec 2018 (Est). Private & Confidential Crown Agents Macroeconomic & Market Outlook 16
End of QE Risk Private & Confidential Crown Agents Macroeconomic & Market Outlook
Central Bank Balance Sheets Have Supported Risk Assets G4 Central Bank Balance Sheets % US, Eurozone & Japan Central Bank GDP vs MSCI World Equity Index Balance Sheets % GDP Source: Bloomberg. Data from Dec 1992 to Mar 2018. Source: Bloomberg. Data from Jan 1999 to Feb 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 18
ECB Could Stop QE By The End of 2018 Eurozone Manufacturing & Non-Manufacturing Eurozone, Headline & Core Inflation, & PMIs, & Consumer Confidence Wage Growth Source: Bloomberg. Data from Apr 2015 to Mar 2018. Source: Bloomberg. Data from Mar 2007 to Feb/Mar 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 19
BoJ Likely to Continue QE to 2019 Japan Manufacturing & Non-Manufacturing PMIs, Japan Headline & Core Inflation, & Wage & Consumer Confidence Growth Source: Bloomberg. Data from Apr 2015 to Mar 2018. Source: Bloomberg. Data from Mar 2007 to Feb 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 20
Global QE Until 2019 Central Bank Net Asset (USB Bln, 3M MA) Source: Bloomberg. Data from Dec 2001 to Dec 2019 (Est). Private & Confidential Crown Agents Macroeconomic & Market Outlook 21
Global Trade War Risk Private & Confidential Crown Agents Macroeconomic & Market Outlook
Rising Trade Has Helped Global Economic Growth, Leaving Many Economies Vulnerable to Protectionism Exports to the US & Trade Balance with the US World Trade & Global Manufacturing PMI (% of GDP, 2011) Source: Bloomberg. Data from Apr 2015 to Mar 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 23
Tariffs Unlikely to Rise to 1930s Levels But Potential Impact Non-Negligible US Average Tariff Rates (1821 – 2016) Effect of an Increase in Global Trade Costs Source: Bloomberg. Based on US raising import costs by 10% or 20% and the rest of the world retaliates by the same amount. Private & Confidential Crown Agents Macroeconomic & Market Outlook 24
Brexit Risk Private & Confidential Crown Agents Macroeconomic & Market Outlook
UK Consumer Hurting UK Wages & Inflation UK Retail Sales & Consumer Confidence Source: Bloomberg. Data from Mar 2007 to Feb 2018. Source: Bloomberg. Data from Dec 2000 to Feb/Mar 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 26
House Prices are Vulnerable London House Price Affordability % of New Loans on Fixed Rates Source: Bloomberg, Nationwide. Data from 1983Q1 to 2018Q1. Source: Bank of England. Private & Confidential Crown Agents Macroeconomic & Market Outlook 27
Brexit Likely to Be Negative for UK But Very Modest For Global GDP Effect on UK GDP over 15 Years of Global Impact of Hard Brexit Different Brexit Scenarios Source: House of Commons Exiting the European Union Committee. Source: Bloomberg. Global impact over three years of a hard Brexit, based on cost of imports between the UK and the rest EEA = European Economic Area, FTA = Free Trade Agreement, WTO = World Trade Organisation. of the EU rises by about 5%. Effect on GDP over 15 years of different Brexit scenarios. Private & Confidential Crown Agents Macroeconomic & Market Outlook 28
Political Risk Private & Confidential Crown Agents Macroeconomic & Market Outlook
Political/Policy Risks Have the Potential to Increase Volatility Geo-Political Risk Index ➢ Middle East – E.g. Saudi Arabia vs Iran in Yemen (Shia Houthis) & Syria - Oil Price Spike. ➢ North Korea – Nuclear Escalation. ➢ Russia – Sanctions/Diplomatic Expulsions/Syria. ➢ Eurozone – E.g. Italy, Germany. ➢ Excessive Regulation of Large Technology Companies. Source: “Measuring Geopolitical Risk”, Dario Caldara & Matteo Lacoviello. Based on the monthly number of articles related to geo-political tensions. Data from Jan 1985 to Apr 2018. Private & Confidential Crown Agents Macroeconomic & Market Outlook 30
Global Debt Risk Private & Confidential Crown Agents Macroeconomic & Market Outlook
Global Debt Load Has Ballooned Global Total Public & Private Debt (Trillion USD) Source: IMF. Private & Confidential Crown Agents Macroeconomic & Market Outlook 32
China Total Debt Has Grown Enormously Leaving Borrowers Vulnerable China Debt Levels % GDP China House Price Growth Source: Bloomberg. Data from Dec 2004 to Dec 2017. Source: Bloomberg. Data from Dec 2007 to Dec 2017. Private & Confidential Crown Agents Macroeconomic & Market Outlook 33
Debt is Sustainable As Long As Growth & Profits/Wages Are Strong China Economic Growth China Industrial Profits Growth Source: Bloomberg. Data from Mar 2008 to Feb 2018. Source: Bloomberg. Data from Dec 2011 to Dec 2017. Private & Confidential Crown Agents Macroeconomic & Market Outlook 34
Market Outlook Private & Confidential Crown Agents Macroeconomic & Market Outlook
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