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June 27, 2018
This edition reviews the global macro outlook, the risk of a trade war, and geopolitical developments in Europe. Read on for our views on the US macro outlook and the Fed, the eurozone and the ECB, and China’s macro outlook and risks. Find also a summary of our views on key themes as well as on the different asset classes and the main macro and markets forecasts. [more]
marcos.arana@db.com quinn.brody@db.com himanshu.porwal@db.com 27-Jun-2018 raj.hindocha@db.com thehouseview@list.db.com http://houseview.research.db.com Deutsche Bank AG/London The views expressed above accurately reflect the personal views of the authors. The authors have not and will not receive any compensation for providing a specific recommendation or view. Investors should consider this report as only a single factor in making their investment decision. Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. FOR OTHER IMPORTANT DISCLOSURES PLEASE VISIT http://research.db.com MCI (P) 091/04/2018. Deutsche Bank Research The House View Snapshot Macro views World  Growth has slowed over the last several months, but it remains broad-based and the latest data suggests the trend has stabilized. In most major cases, economies are growing at above-potential rates. We expect global growth to rise to +3.9% this year, marginally above 2017, as fundamentals remain supportive, but to decelerate over the medium term back to trend levels  Downside risks, including trade conflict and geopolitics, have returned to prominence. While positive recent political developments in Italy have eased concerns about immediate stress, the risk of a disruptive trade war has risen. Measures announced so far will likely have a small macroeconomic impact, but further escalation may negatively impact confidence, tighten financial conditions, raise prices, and weigh on growth  Europe and the US have renewed their economic divergence for now. While European growth has decelerated notably this year, the US remains supported by fiscal stimulus and strong fundamentals United States  Growth to accelerate in 2018 to an annual pace of +3.0%, the fastest since 2005, still boosted by the combination of tax cuts and increased government spending. There are risks that this fiscal boost takes longer to impact the economy than we originally expected, in which case some of the boost may occur in 2019  Economic momentum remains very strong and supports our above - consensus expectations for growth this year. Financial conditio ns remain accommodative despite recent volatility and dollar strength  Recent wage and price data supports our expectation of upside surprise to inflation this year. Labour markets have tightened and little slack remains, so growth will be increasingly infl ationary this year and next Eurozone  We expect the Eurozone economy to grow +2.1% this year, a modest slowdown after 2017’s impressive performance. Momentum has softened over the last several months, but remains comfortably above our estimate of potential growth (which is around +1.0%). There are risks of a more disruptive trade war, including proposals by the US to raise tariffs on EU car exports, which would weigh on sentiment and growth  The modest slowdown reflects our view that the recent pace of growth is unsustainable. Cyclical momentum will naturally decline as output gaps close; financial conditions will tighten as the ECB withdraws accommodation; and the boost from net exports will fade as Asia decelerates  The new Italian government has so ftened its rhetoric on potentially disruptive issues like the euro, and Italian fundamentals have improved post - crisis. Financial conditions should not tighten enough to derail the ECB’s existing policy path, though pressure could resume later this year su rrounding the 2019 budget discussions China  We expect China’s economic growth to slow down +6.6% this year. Fiscal policy has remained supportive, boosted by healthy land sale volumes which have offset planned tightening. This fiscal boost will likely fade later this year, and monetary policy is likely to continue being deployed to support growth  The outlook regarding trade conflict with the US has deteriorated. Measures already announced will shave only a small percentage off of growth this year, but p roposals to expand tariffs to cover more exports will have a notable negative macro impact. Authorities would likely respond by easing policy more aggressively Emerging Markets  EM growth is accelerating and inflation is rising, though risks are elevated from the strong dollar, higher US rates, potential trade conflict, and withdrawal of major central bank accommodation. Thus far, EMs have remained resilient in the face of market pressure headwinds.  In Turkey, with incumbent President Erdogan winning the first round of electcion, political uncertainity is over, but markets will now await clarity on the future economic path  Inflation dynamics will dictate policy, though trends are diverging across regions and countries. EM performance and flows are being mo re differentiated and this will continue Monetary Policy  Fed: expect 2 more hikes in 2018, i.e. total 4 hikes this year, and 4 hikes in 2019  ECB: QE to slow to €15bn per month in Q4 and end in Dec 2018; first hike not before Sep 2019  BoJ: no changes in target yields on YCC this year, continued reduction in pace of JGB purchases  BoE: o pportunistic one - off rate hike in August assuming some rebound in data  PBoC: shift in stance to easing; recent RRR cut to be effective July 5th; expect one more cut later in 2018  EM: increasing CB divergence; expect hikes in Asia, and hold in most EMEA & LatAm Key downside risks  Rising trade tensions between key trading partners (US, China, Canada, EU) would disrupt global growth  Political uncertaint y in Europe (Brexit, Italy, Germany, Spain) leads to increase d financial market volatility  Policy divergence between major Central Banks for a prolonged period could lead to currency war and further impact trade balances  Stronger US dollar forces investors to liquidate EM posi tions; causes overshooting selloff The House View: Snapshot (Continued) 27 June 2018 Key themes  Trade wars: increase in trade tensions over the last month the key focus for markets. US administration has implemented several protectionist measures and seems intent on imposing even broader ones in the near-term. While the direct macro impact of the existing measures will likely be small for now, further escalation may impact confidence and hurt growth more significantly. We view substantive escalation of trade disputes, leading to unilateral imposition of further tariff and non-tariff barriers as a real possibility  US overheating: with the US economy growing already above potential, range of US policies (tariffs, tax-cuts etc) risks sending inflation higher and can cause overheating in the economy  Easing growth momentum: global macro momentum has eased this year, but it still remains strong and is consistent with still robust GDP growth. We expect 2018 to mark peak cycle  Political risks in Europe: EU political landscape looks busy with multiple issues on hand – migration crisis, trade conflict with US, Brexit negotiations, dispute within German coalition, new populist govt in Italy – all of which have potential to inject volatility into financial markets  Return of central bank policy divergence: renewed divergence between Fed and ECB. The Fed is tightening policy to avert overheating risks while the ECB has shifted in a dovish direction. A prolonged period of divergence could lead to currency wars and further weigh on trade balances Market views Market sentiment  R isk assets ultra sensitive to trade rhetoric  Markets remain supported by strong macro fundamentals. We maintain our overarching strategic views, though downside risks from trade and politics have intensified Equities  Bullish US equities. Underlying growth is robust, profit margins are still rising, buybacks are set to reach record highs thi s year  In Europe - we remain underweight European equities versus US equities, as our projections for relative macro surprises and the euro imply around 5% relative downside over the coming months. We prefer Swiss equities to France, and banks to non - financial cy clicals and defensives  Higher real rates are not a problem for equities as long as inflation remains under control Rates  Strategically bearish. We revised up our year - end US10Y yield forecasts to 3.5% on higher supply, stronger growth, more Fed tightening, and expected softer pension demand  In Europe, we remain bearish but have moderated our year - end forecasts for Bunds to 90bps, on softer growth and expected low volatility FX  Near - term risks are balanced for dollar, but our strategic view is still for further dollar weakness over the next year given the deteriorating flow outlook  Neutral for Euro as we expect growth momentum to rebound  Bullish yen as external financial position improves, currency remains undervalued Credit  Cautious and select ive. Dovish ECB guidance supports European credit spreads, though downside risks from trade, more aggressive Fed hiking, and European politics remain EM  Fundamental driver of EM remains growth, and the outlook remains strong  Near - term upside limited by ri sk from trade war, higher US rates, stronger dollar, fear of outflows Key macro and markets forecasts Recent publications  The House View: Trade war tensions , 26 - June - 2018  The House View: Infographic – Risk of US policy-driven overheating , 18 - June - 2018  The House View: Infographic – Italy: relax, at least for now , 06 - June - 2018  The House View: Supported global growth , 22 - May - 2018 2016 2017 2018F 2019F Current 2017 2018F 2019F Current Q4-18 Q2-19 Q4-19 Global 10Y yield (%)2.853.503.60 US1. 10Y yield (%)0.330.901.05 Eurozone Germany1. -0.10-0.10-0.10-0.10USD/JPY 1101029995 Japan 0.500.500.750.75S&P 5002,7423,000 UK1. 600382395 China6. (USD/oz)1,2571,2601,3001,300 Oil WTI (USD/bbl)72605959 Oil Brent (USD/bbl)78656464 GDP growth (%) Central Bank policy rate (%) Key market metrics Current prices as of27 Jun, 2018