Strong expectations for corporate profitability support equities
The IMF maintained its global GDP growth forecast for 2018 and 2019 at 3.9% (July 2018 WEO), 0.2 pps above the outcome in 2017, which was the strongest performance since 2011. However, it downgraded its forecast for Europe and Japan (see table).
The IMF views the balance of risks as tilted to the downside in both the short-term (versus “balanced” in April) and in the medium-term (as was also the case in April). The negative shift is mainly related to an increased possibility for escalating and sustained international trade disputes.
Regarding the latter, trade brinkmanship continued in the past week. Indeed, on July 10th, the US announced increased tariffs of 10% on $200 billion worth of Chinese imported goods. The tariffs will not be imposed for two months, allowing a period of public comment on the list of products. A public hearing is scheduled for August 20-23.
Although the direct effects on global GDP from the higher tariffs are expected to be modest, the wild card for economic momentum is their potential negative implications for business sentiment and consequently for investment decisions. Recall that, according to business surveys from regional Federal Reserve Banks in the US, the effects on capital expenditure plans, at least for the short-term, appear contained, so far (see graph).
Corporate earnings guidance for future quarters provided by companies will be closely monitored, inter alia, for assessing the impact of trade tensions on business sentiment. Regarding company results for Q2:2018, the S&P 500 earnings season commenced in line with expectations (see page 3).
Global equities recorded gains for a second consecutive week (MSCI World: +1.0% wow | +0.4% ytd), as investors’ attention remained focused on strong current fundamentals (still robust economic activity, corporate profits).
The Nikkei 225 over-performed, rising by 3.7% wow (-0.7% ytd), on the back of a weaker Japanese Yen (-1.7% wow against the USD, to ¥112.35, a circa 6-month low), due to weaker safe haven demand.
Chinese equities, during the past week, recovered some of their severe losses in recent months (CSI 300: +3.8% wow | -21% since late-January 2018), but fell slightly on Monday (-0.6%), following the release of Q2:2018 GDP data (see Economics).
Regarding government bonds, the flattening of the yield curve continued during the past week in the US, with the 10/2 spread for US Treasuries narrowing by 4 bps, to an 11-year low of 25 bps (-27 bps ytd).