In periods of extreme volatility within asset markets, it is hugely important to take a step back from the noise and return to the fundamental backdrop. Our view remains one where activity paints a supportive macro picture, particularly out of developed markets. Data in the US, UK and Europe remains encouraging; yes, it is backward looking in some instances, but the message is one of resilience as we approach the last quarter of 2015, even in the face of weaker emerging economy headwinds.
US data exhibits an economy which is broadening out in terms of expansion and one that no longer requires an emergency policy stance from the Federal Reserve. At the headline level, last week’s revision higher of second quarter GDP to 3.7% was corroborative of our view. US consumption remains healthy, while the positive implications of the oil dividend should continue to play out. We remain of the view that the Fed should start to gradually raise rates and the economy and markets can digest this. The missing link remains inflation, but in the Jackson Hole summit over the weekend the Fed reinforced its conviction that the current disinflationary impulse is energy led and transitory.
“In the UK, the story is similar and while the second quarter GDP number last week was left unchanged, the year-on-year number of 2.6% remains a standout in the OECD framework.”
Within Europe, the story has been one of improvement for some time and data reports released since the volatility in markets unfolded have done nothing to alter that picture. Two reports have caught our eye of late: a) Spanish growth and b) credit growth in the eurozone.
It was not that long ago that Spain was tarred with the same brush as Ireland, Greece and Portugal, a casualty of the broken eurozone project. Roll forward a couple of years and the Spanish have taken the medicine, initiated much needed reform, particularly in the employment market, and the economy has now grown for eight consecutive quarters. What is most encouraging is that domestic demand is now driving some of this growth, reinforcing the broadening out and entrenchment of the recovery.
Last week’s report from the European Central Bank (ECB) on credit growth showed positive growth in lending to the private sector, reaching the highest growth rate since 2011.This trend is key to a sustained economic recovery.
Volatility in markets may persist, particularly given the number of variables they currently have to digest. It may be a while before calm is restored. However, we continue to believe the fundamental backdrop remains supportive and that opportunities will materialise as a result of current market gyrations.
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