Over the past 3 weeks, global markets have decoupled, with price action suggesting strong consensus positioning across the developed world. In particular, investors have quickly priced in that Trump will bring meaningful fiscal stimulus, accelerated growth and higher interest rates (see equities at all-time highs, USD at multi-year highs and bonds at one-year lows). Conversely, Europe is expected to be trapped in a monetary policy “groundhog day” (US-Germany 2yr yield spread touched record 1.81% this week), whilst there remains little confidence on underlying growth and reform (Italy-Germany bond spread widest in 2.5 years, Italian equities 23% lower YTD in EUR terms). As it relates to emerging markets, fund flows have aggressively reversed, but currency and equity markets have mostly held up well.
It may be that markets have got this right; the US will continue to out-perform as Trump delivers, Europe will lag on ineffective policy and emerging markets will “muddle-through”, with domestic growth, cyclical positioning and reform facing off against a stronger dollar head-wind. However, given the degree of political uncertainty (reality vs. perception for Trump and elections across Europe), we think there is a great deal of risk to the market’s central outcome for 2017.
Next week brings a brief respite ahead of the Italian constitutional reform referendum (4th December) and ECB (8th December) and FED (12th December) meetings.
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