Barclays June 2018 Global Outlook: Glass Half Full

  • The US has resumed cyclical leadership of global growth and is likely to pull ahead of other major economies for the next few quarters. Europe and Japan have not broken out of Q1’s soft patch, but domestic fundamentals look solid in both areas. We expect a modest slowdown in China in Q2 and Q3, but also a policy response in H2 that prevents a sharp pullback in growth
  • The global economy should grow at 4% in 2018, a similar pace to 2017. However, the expansion is less broad based and more US dependent than we had forecast at the start of the year, when data seemed uniformly upbeat
  • Trade remains a tail risk to our positive outlook. The tariffs discussed so far should not have a material growth effect. But if tit-for-tat escalations continue, markets could at some point downgrade growth expectations. We are less worried about European politics; the periphery is much better poised to avoid contagion than in the past
  • Risk assets have started down a Q1 slowdown, political volatility in Europe, and rising US trade frictions. To us, this highlights how supportive the macro environment remains. Growth is decent, inflation pressures are contained, central banks have given more clarity on monetary policy, and corporate earnings are strong
  • Apart from the macro backdrop, our market views are affected by two themes:
    • US short-term rates are among the world’s highest, due mainly to expectations of improved returns in the US. This marks a rare instance of the world’s risk-free asset being among its best yielding
    • Investors should stop worrying about what happens if 10y Treasuries rise above 3%. We do not expect a break-out in longer yields and believe supply fears are overdone. But even if we are wrong, any sell-off is likely to be limited and unlikely to cause a lasting risk-off
  • We recommend a modest overweight for global equities over fixed income; our yearend target for the S&P 500 and for 10y Treasuries is 2900 and 3% respectively. In general, we tilt towards DM assets over EM and expect the USD to strengthen against EM currencies but be range-bound against the EUR and JPY. This is not a call to withdraw fully from EM, but to adopt a more selective posture. The oil rally is likely to remain stalled in Q3, but the risk of any breakout is mainly to the upside

Barclays Global Outlook Overview, June 2018

Image Source: Bloomberg, Barclays Research