Markets take cue from US policies and earnings season

The global economy ended 2016 on a strong note, and started this year on the same vein. Economic data such as PMIs and leading economic indicators form the world’s major economies continue to indicate strong and robust growth, at least in the short to medium term. This positive string of economic data releases can well be explained by a concoction of looser economic policy and expectations of an improving global economic scenario. This mix of policies in the leading emerging and developed economies is propelling an increase in consumer’s propensity to consume and policies are expected to remain growth-friendly over the next couple of year.

However, some emerging markets will be left with no choice but to tightening their current accommodative stance and adjust their imbalances. 2017 is expected to be a year where political risk takes centre stage and the economic policies of certain countries face a great deal of risks which could impact the trajectory of inflation, both domestically and worldwide. The US fiscal and monetary policy and the impact they could have in the months ahead on the US dollar and respectively on emerging market currencies is sure to be a recurring theme, not only during the first quarter of 2017 but also for the remainder of the year. The US dollar is pivotal for emerging market economies, and this year this relevance is expected to be exacerbate and further accentuated as the Trump administration and its new policies begin infiltrate in the world economy.

The manner and extent to which US policy, both fiscal and monetary, evolves will be a crucial consideration, both for corporate within the Eurozone and Emerging markets but also their respective authorities and, most importantly, central banks.

In the meantime, we have seen sovereign yields of Italian and French government bonds widen significantly over recent week against their counterparts, reaching recent wides. As we have stated in a number of our recent publications, political risk in the single currency region is expected to be the major driver of market risks in the months ahead, and this has been the major reason behind the moves in Italian and French yields of late. Economic data has remained robust and is expected to remain so in the months ahead.

It is still premature to decipher when Europe could possibly benefit from the pro fiscal measures to be adopted in the US, but what is certain is that the state of the Eurozone’s economy will undoubtedly weigh on the MPC’s members in its rate setting meeting. Not so much for the decision of interest rates, but more in terms of the withdrawal of liquidity from the market, in the form of additional reduction in monthly purchases.

Not much of a data laden week this week. Central bank meetings are quite a long way to go too. Inflation in the US and GDP, industrial production and ZEW survey expectations in the Eurozone are sure to keep investors guessing as to where both economies are heading next and what their respective central bank’s reaction will be to this fresh wave of numbers. US earnings season is almost over and is gathering steam in Europe, but so far we have emerged relatively unscathed, on the contrary, earnings momentum has been sustainable, and this has boded well for risky assets, namely equities and high yield bonds.