Economics and Strategy

Global Growth Increasingly Leaning on Both Fiscal and Policy Support, but Economic, Equity and USD Risks May Skew to the Upside

In the U.S., Chief Financial Economist Aneta Markowska expects the economy to hit a speed bump in Q4, assuming there is no additional fiscal stimulus before the election. After expanding by over 30% annualized in Q3, she forecasts GDP to slow to low single digits as consumption stalls, with a partial offset from inventory restocking. Aneta expects the speed bump will lead to further Fed easing, which is most likely to come in the form of a “twist” announced in December.  She remains constructive on the outlook for 2021, given the prospect of a vaccine by spring/summer, and a resumption of fiscal expansion which is likely in most election outcomes.

As for the UK and Europe, while COVID-19 and Brexit will likely dominate policy discussions in coming months, Chief European Financial Economist David Owen points out that our real time indicators show a UK economy that is outperforming expectations, but at risk from further shutdowns. Similarly, the prospects for the euro area economy are brighter than three months ago, but the region has also seen a resurgence in COVID-19 cases in recent weeks, which means that the recovery continues to face significant headwinds. Against this backdrop, and with inflation well adrift of the target, the ECB is expected to remain extremely accommodative throughout 2021, with further easing measures likely to be announced in the coming months.

David Zervos, Chief Market Strategist, highlights recent headlines calling for the death of the USD, based on the demise of its reserve currency status, impending hyperinflation, the rise of the RMB as the preeminent global payment currency, the looming fire sale of foreign central bank U.S. Treasury reserve holdings and plenty of anti-Fed rhetoric. That said, he points out that despite these arguments, the Fed’s broad trade-weighted USD index is still ~+1% year to date, and the U.S. Dollar Index, or DXY, is only down less than 3%. David believes that once risky real rates begin to rise in the U.S., which he thinks may have already begun, metals will become seriously challenged, equities will continue to rise and the USD will turn toward an appreciation phase.

In terms of equities, Christopher Wood, Global and Asia Equity Strategist, points out that the latest Chinese macro data confirms the ongoing cyclical recovery. As a result, he believes we may have seen the top for Big Tech’s leadership of the U.S. stock market, and the related unprecedented relative out performance of growth over value. The catalyst, in his view, would be continued cyclical momentum as the virus continues to prove less virulent than previously feared. If Big Tech’s business models were massive beneficiaries of the economic lockdowns, as has clearly been demonstrated by these companies’ earnings reports, it follows that the same companies will be relative losers if the world goes back to normal sooner rather than later. On that point, Christopher has never bought into the view that the world will be living in a “new normal” as a consequence of COVID-19. From a longer-term perspective, if it is indeed the case that the policy response to COVID-19 marks the beginning of the end of the deflationary era, that should also benefit value over growth. Still, in the short term the Federal Reserve’s precipitous return to the zero bound has provided further multiple expansion for Big Tech and related growth companies, while its commitment to softer inflation targets and talk of fixing longer term bond yields, if necessary, has served to reassure investors that rates will be lower for longer, meaning that “value” still has the system working against it.

Global Equity Strategist Sean Darby highlights that global equities entered 3Q 2020 with strong earnings revisions, an upswing in global trade underwritten by inventory restocking, a strong Chinese currency and a reflationary weaker dollar. Equity funds saw an improvement in inflows as risk aversion reversed and sentiment improved. That said, Sean expects volatility to rise entering the last mile of the U.S. Presidential election and as some crowded trades are unwound.