Global Outlook Q2 2024: Tailwinds but not all plain sailing

Not all plain sailing

There are exceptions to the resilient global growth, and there is a risk of unexpectedly persistent inflation challenging central banks’ plans for policy easing.

US

The US looks set for continued robust growth with inflation still slowing gradually, keeping rate cuts firmly on the agenda, according to Markets 360 economists. However, inflation has the potential to cause the Fed to alter course by either delaying the start of the cutting cycle or – somewhat more likely, Markets 360 believes – shortening it.

Eurozone

Green shoots in eurozone growth have supported the team’s view that activity is set to strengthen as the year progresses. Even so, they think the case for rate cuts is more compelling in the eurozone than in the US. Eurozone growth has been below trend for the past few quarters, while energy played a greater part in the inflation shock there than in the US.

China

The main exception to the global growth story is China, both structural and cyclical factors continue to weigh on growth. Policy easing remains on the cards, but probably relatively cautiously.

Japan

When it comes to monetary policy, the outlier among major advanced economies is still Japan, where the economists expect inflation to settle at levels well above the pre-Covid average, allowing the Bank of Japan to set a course for gradual increases towards neutral policy rates.

EM

The Markets 360 team believes the picture in emerging markets remains relatively benign, as resilient US growth and a disinflationary trend should allow most central banks to continue to cut rates, albeit with more restraint from the second half of 2024 than so far. In Central and Eastern Europe in particular, inflation could reaccelerate from Q2.

With still relatively restrictive real rates, the team thinks Latam economies should continue to lead in the pace and magnitude of rate cuts this year, while in EM Asia monetary easing is likely to be as shallow on the way down as it was on the way up.

Rates

With the cutting cycle likely to be gradual against the backdrop of resilient growth, Markets 360 rates strategists think the scope for bonds to rally might be limited. In EM, the team expects rates to perform, as central bank cuts continue.

FX

The FX strategists remain bearish on the USD in the medium term. However, the current cyclical picture and the upside risks from the US election may prevent the USD weakening for now.

Equities

While valuations are expensive and positioning heavy, the Markets 360 team believes fundamentals remain supportive for equity markets in both Europe, where they see the greatest upside, and the US. Conversely, they are neutral on China and near-term cautious on Japan, where the hiking cycle will likely see investors reallocate capital between export and domestic sectors.

Credit

In line with the economists’ fundamental view, the signs of a credit soft landing are increasing. Such regimes tend to be characterised by low yet positive returns and, above all, non-volatile returns.

Commodities

The Markets 360 analysts expect Brent prices to weaken in the short term, as refining capacity increases in the spring, but to rise again in Q3, as supply cuts are rolled over and global refinery achieves its peak, before ending the year broadly in line with current levels.

The team’s view is that gas prices, already at their lowest since 2021, are likely to fall further in Q2, weighed down by high stocks. As fundamentals strengthen, they expect gas prices to recover later in the year.

Sustainability

January’s record issuance supports the sustainability team’s expectation of continued growth in green bonds. They also expect progress on all three key drivers of the nature space: policy; transparency and corporate disclosure; and innovation.