Global weekly: Soft patch

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ABN AMRO Private Banking, Expertise, Wealth Structuring, Financial planning, Wealth structuring, Investment Advisory, Portfolio Management

The road to stabilisation is proving bumpier than expected. The US economy has hit a soft patch and global growth is lacklustre. Equity markets are rangebound and oversold, while bond markets have been hurt by stress related to low oil prices.

The US economy has hit a soft patch. Global growth has stabilised, but at a low level, while global manufacturing and trade remain weak. The expected positive impact on consumer spending from low oil prices has not yet materialised. The low oil price has, however, created stress in the energy and materials sectors. This stress is now spreading to financial institutions. Banks are increasing provisions related to energy company financing.

In general, fixed income markets are taking a dim view on growth and inflation. The equity market can be characterised as range-bound and oversold. The current volatility, however, is based more on technicals than fundamentals, with too much recession risk priced in.

Central banks hold the key to an improvement in market sentiment, and they have already started to react. The Bank of Japan (BoJ) recently moved to negative interest rates, the European Central Bank (ECB) is expected to continue to ease monetary policy in March and the market is already expecting fewer rate hikes by the US Federal Reserve in 2016.

The weakness related to global growth, China and oil has been already heavily discounted by financial markets. It is not expected that the problems seen in the energy, materials and financials sectors will result in systemic risk. Instead, a bumpy period of stabilisation is expected to continue.

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