Heading into the second half of 2015, global growth is on a positive trajectory, though the pace has slowed. Deflationary pressures are subsiding and we think output gaps are closing in the US and UK. As these central banks edge closer to rate hikes, the other largest economies remain heavily committed to stimulus. Rate market volatility is picking up, but macro conditions are still broadly supportive of risk assets. As for the main risks, China’s slowing growth is still a concern and uncertainty over the fallout from Greece clouds the Eurozone outlook.
- The US is close to fulfilling the requirements for a rate hike in September, with growth picking up from another disappointing first half and inflation trending slightly higher. Soft consumer demand and dollar strength pose some downside risks.
- The Eurozone’s comeback this year is losing luster as German activity slows. We expect some market volatility as Greece’s future in the Eurozone is decided, but we think the European Central Bank (ECB) will act to prevent contagion to the broader markets and economy.
- China’s indicators suggest that growth is likely undershooting the official 7% target. Policy easing is having less impact than hoped and China’s equity market looks overheated.
- Our positioning continues to reflect the divergence theme. We see rates in the US rising relative to core Europe, and the US dollar strengthening versus other developed market currencies. We are overweight corporate credit, and positioning selectively at this later stage of the cycle.
