The rest of the world is falling behind and the “synchronous global growth” narrative that defined 2017 and, together with “still-subdued inflation”, underpinned the low vol. regime, is giving way to a narrative about American exceptionalism. The threat of a global trade war doesn’t help.
That’s from “Heat Wave? One Bank Checks Their Heatmap For Signs Of A High Volatility Regime“, a post that found Goldman taking a look at their current activity indicators in light of recent stumbles in Europe and emerging markets.
Specifically, the bank’s CAI was tracking at 4.4% in June, down from 5¼% at the end of last year. In a note out Monday, Goldman also noted that their “leading CAI is now pointing to some further slowdown to 4% or a bit less in coming months.”
So what’s the problem here? Well, it’s not the U.S., where economic activity is still reasonably robust thanks in no small part to late-cycle fiscal stimulus, which has buoyed earnings growth, juiced buybacks and generally emboldened both businesses and investors despite the risk that embarking on expansionary policy this late in the cycle will overheat the economy and force the Fed’s hand.
Rather, the problem is the rest of the world and to the extent growth is on shakier footing outside the U.S., you can at least partially blame the threat of a trade war which, if Wednesday’s action in commodities was any indication, now threatens to bring about across-the-board demand destruction.
It’s against this backdrop that Barclays is out with the latest version of their quarterly global macro survey (which represents the views of 400 institutional clients) and as the bank notes, “for the first time in at least four years, more than half of respondents think a disappointment [in global growth] lies ahead.”
What’s perhaps more notable than that, is the following visual which shows that despite (or, perhaps because of) the worsening relationship between Washington and Beijing, investors now believe that when it comes to where growth is most likely to disappoint, Europe and emerging markets as a whole are now very nearly on par with China:
The paradox there lies in the fact that part of the reason why the outlook for Europe and EM ex-China has deteriorated is due to the increased threat of a global trade war. Of course the frayed relations with China are emblematic of that dispute.
Barclays goes on to say that just as “growth leadership has shifted back to the United States, so have expectations about returns.” Here’s more:
Survey respondents now overwhelmingly think the US will produce the best returns over the next three months. In equity markets, 60% think the US will outperform. In high grade credit, investors prefer the US over Europe seven to one. The USD is king. 64% of FX investors prefer the USD as a long. For context, the next nearest most popular long is the Australian dollar, with only 11% of votes. Only 15% see the USD as a good short.
One place the optimism about America isn’t necessarily reflected is in respondents’ feelings about the Fed hiking cycle.
“Despite this apparent enthusiasm for all things American, survey respondents continue to question the Fed’s desire to tighten policy”, Barclays writes, describing the following visual.
As far as the main risk to markets and the outlook more generally is concerned, you already know the story, but on the off chance you need to hear it again, we’ll leave you with one last quote from Barclays’ survey.
But from investors overall, on a global basis, the message is clear: a trade war is the biggest concern for almost half of those surveyed, and threatens to poke holes in an already patchier economic outlook