global macro economic outlook · 2016. 9. 5. · ecr research bv | | thursday, 1 september 2016 | 2...

Global Macro Economic Outlook Macro & Political| by ECR Research BV | www.ecrresearch.com

the clever research solution for time-pressed decision makers

The calm before the storm?

Thursday, 1 September 2016 | Summary

> The financial markets have little reason to hold a very optimistic

view of the economic future, especially because the increase in

the workforce and productivity are clearly in a downtrend.

> However, this is offset by a surplus of money, which has led to a

hunt for returns. In addition, the authorities are trying to

stimulate the global economy in all manner of ways, but as long

as structural reforms fail to materialise, this means fighting a

losing battle.

> A great deal may go wrong in Europe in the period ahead. The

risks are extensive.

> Opinion on the US economy is divided. Some economists

anticipate persistent low growth for now, expecting the Fed to

only raise interest rates very modestly. We have a more optimistic

view.

> We do expect the Fed to raise interest rates too little, too late for

the time being, as a result of which inflation expectations will not

remain at their current low level. The global economy requires

higher inflation, which we expect the rest of the world to

ultimately achieve by fiscal stimulus and proceeding with some

kind of helicopter money.

> Investors should gradually be shifting their portfolios towards

inflation hedges. However, if the Fed initiates a rate hike soon,

this is not the right time for this.

Global Macro Economic Outlook

Offers a clear insight into how the

global economies interrelate and

affect each other. We outline how

monetary policies of major central

banks affect the various financial

markets and offer concrete mid-term

predictions.

QUESTIONS OR COMMENTS?

Edward Markus

Maarten Spek

+31 (0)30 232 8000

[email protected]

INDEPENDENCE

With over 35 years experience ECR

has become one of Europe's leading

providers of independent research

on global financial markets, political

developments and asset allocation.

ECR Research BV | www.ecrresearch.com | Thursday, 1 September 2016 | 2


> The S&P 500 index is in a distribution phase, and will subsequently end up in a downtrend.

We do not expect the other global stock markets to perform much better in the medium term.

> We see the Fed raising its interest rates by 0.25% this year, and repeating this two or three

times in 2017. We see US long-term interest rates coming under increasing upward pressure.

This applies to a far lesser extent to ten-year German interest rates for the time being.

> We see EUR/USD declining to 1.00 or lower in the coming quarters. A decline below 1.11 and

1.09 would give off confirmation signals for this from the perspective of a technical analysis of

charts. If the rate exceeds 1.13, a further increase to 1.15 – 1.17 may occur first.

Uncertainties everywhere

The past holiday months were characterised by very limited outcomes on the financial

markets. However, we have serious doubts about whether this will persist for long.

In Europe, to start with, we see the greatest – but certainly not the only – danger coming

from Italy, where a referendum will be held in October or November on the revision of the

parliamentary system. However, it should be feared most Italians will regard this as a referendum

on the government policy of Prime Minister Renzi. The outcome of this is very uncertain, because

Renzi has lost a great deal of his popularity. Should Renzi lose as a result, it is very likely he will



step down and new elections will be called. According to current opinion polls, the anti-EU

parties will win them by a wide margin. Beppe Grillo, the leader of the Five Star Movement

(M5S), which will then probably become the biggest party, has already announced he wants to

organise a referendum in this case on membership of the EU and EMU. The outcome of this may

easily turn out to be negative, because many Italians feel left in the lurch by Europe, in terms of

the reception of refugees in particular, but also with regard to the public deficit, for which Brussels

keeps refusing them permission to drive it up. In the eyes of many Italians, this is the reason why

the size of the Italian economy is still a great deal smaller than in 2007. Incidentally, what is very

striking here is how few Italians realise how much help they receive from the ECB. It is

exclusively due to the actions by the ECB that Italian interest rates are now close to those of

Germany. Otherwise they would have been at 6% or higher, and the Italian government would

have gone bankrupt. Nonetheless, this is not recognised by many Italians.

Differences of opinion in difficult times

However, the differences of opinion within Europe are certainly not limited to just the

above. For example, opinions differ considerably in respect of the reception of refugees,

border restrictions by Frontex, how Putin should be dealt with, how intervention in the

Middle East should occur, how the Brexit should be dealt with, and the extent to which the

power of Brussels should be increased or reduced. At least as extensive are also the

disagreements as to how to deal with the euro. Should there soon be a banking and fiscal

union in connection with the currency policy, or is this actually not desirable? Besides the

referendum in Italy, election results in the Netherlands, France and Germany will also

highlight all these differences in points of view far more clearly over the coming twelve

months.



The European economy slowly continues to ail. At approximately 1.5%, growth is fairly low and

moreover tends to be falling back, but there are no great fears of a recession yet. Weak points for

Europe are the absence of fiscal stimulus, low levels of wage increases as a result of high

unemployment, little enthusiasm on the part of banks to supply new loans (because they

often have a lack of equity). Nonetheless, all this is countered by the very loose monetary

policy of the ECB, which mainly drives up asset prices, and therefore the soaring debts at

least continue to be offset by a higher value of assets. Property prices in particular are

performing well. However, just as with Japan, share prices have significantly fallen back

again from their high point in the spring of 2015, despite the recent monetary stimulus

measures. Combined with persistent low growth, this is the reason why great concerns

remain about the future of the European economy.

The IMF therefore recommends also applying fiscal stimulus, but European policymakers are not

keen on this so far. In response to this, the chief economist of the ECB stated in Jackson Hole that

if policymakers do not undertake action, the ECB will have to take further stimulus measures.

Indeed, with the current ailing economy, any shock will be enough to plunge the European

economy into a self-sustaining negative spiral. To a far greater extent, higher growth should create

a buffer against this. The only question is whether this goal may be achieved by monetary stimulus

alone. Indeed, even lower interest rates limit banks’ profitability in credit provision. Lower interest

rates may therefore mean that they will actually supply fewer rather than more loans. This is why

we are eagerly looking forward to the next ECB meeting, which will be held next week. Can

the central bank still come up with measures that have fewer drawbacks than benefits? The

answer to this is very uncertain.



Chinese debt mountains and hesitation among the Japanese

Secondly, many analysts harbour great concerns about the future of the Chinese economy.

Debts are still growing significantly faster than the economy there. Some economists expect this

to lead to a credit crunch before too long, which would fairly rapidly spread across the globe like

an oil slick. Other economists fear this far less, because a fair share of indebtedness consists of

loans by government institutions/banks to public companies. A solution may be found to this.

However, this automatically means that a great deal of the current overcapacity in China will

continue to exist for now. On a global scale, this represents a heavy burden for industry.

Thirdly, approximately six months ago interest rates were reduced to a negative level in

Japan, but share prices reacted to this with a decline and the rate of the yen with an

increase. This cancelled out a great deal of monetary stimulus. Admittedly, the Japanese

population is shrinking fairly rapidly, and therefore unemployment is low there. Hopes are that

shortages on the labour market will soon lead to additional wage increases, as a result of which

purchasing power will increase and growth may pick up. Nonetheless, this is not the case yet. First

of all, the high rate of the yen ensures that Japanese businesses do not want to grant wage

increases in connection with competitive considerations. In addition, the Japanese workforce is

ageing rapidly, and therefore an increasing number of older employees are retiring, to be replaced

by young employees. However, they earn far less than the older employees who retire. This has

also led to Japanese inflation remaining far too low, with not a great deal being required to shift to

deflation again. It was therefore anticipated the monetary accelerator would be hit a great deal

harder and that the government would additionally implement large-scale fiscal stimulus.

However, the latter only materialised on a limited scale.



Monetary action was not even taken at all the last time because the Japanese central bank first

wants to conduct a study into the effects of monetary easing so far. Many economists fear that

they have been negative rather than positive. The central bank will present the results of the

study on 21 and 22 September. Most economists anticipate the central bank will certainly

apply further easing, but at the same time they have great doubts about the impact of this.

This is also reflected in the price movements. The governor of the Bank of Japan declared in

Jackson Hole at the end of last week that the Bank of Japan still has a great deal of scope for

further stimulus, but this only weakened the yen rate to a limited extent.

Markets ignoring the Fed?

Finally, in the US there is a great deal of uncertainty about whether or not the US economy

can continue to grow at a reasonable pace if the considerable weakness outside the US

continues its hold. If the US economy were to continue to grow by 2% or more, the Fed would

have to raise its interest rates. As a result, the dollar would strengthen immediately, and the

emerging markets would end up in trouble again, as a result of their soaring dollar debts. This in

turn, would push down commodity prices, causing problems for commodity exporters. All this

would spill over to the US economy in the guise of declining share prices, tightening monetary

conditions and deterioration of foreign trade. It therefore very much remains to be seen how long

the US economy can continue to grow relatively faster compared to the economies in the rest of

the world. This, in turn, means there is major uncertainty about how the Fed will deal with

the current situation. The markets take into consideration that, due to the above, there is

only very little scope for higher interest rates. The central bank, on the other hand, gives off

more and more signals it certainly intends to initiate a rate hike. In any event, the Fed intends

to create buffers in the form of higher interest rates, in case another recession occurs. However,

so far these intentions fail to make much of an impression on the market.

Will European and Japanese shares see it coming?

Apart from the political developments, the common denominator in all this is that

maximum monetary stimulus has actually already been applied, but that growth remains

low. This is a very serious development because soaring debts are ubiquitous, and they will

start carrying ever more weight in the event of persistent low growth, especially because a

significant proportion of growth is not the result of higher income, but mainly due to more

loans. It is becoming increasingly evident that, as a result, interest and repayment

obligations will constitute such a chunk of disposable income that too little money remains

for investment in elements that may promote growth in the future.

Many economists have doubts in terms of what further monetary and/or fiscal stimulus

may still achieve. Indeed, both create even more debts. Add to this that productivity growth has

been on the wane for years. If this persists – and this looks very likely – this will keep growth low in

any event. Consequently, there is a general impression that the current policy of interest rates at

0% or even negative interest rates cannot be sustained. By creating an enormous amount of



additional money, the central banks cause financial market prices to be manipulated all over the

place. There are increasing doubts whether or not this has led to too much of a discrepancy

between financial market prices and the economic reality. If this bursts, this may lead to enormous

outcomes with shares, interest rates, currencies and so on. Perhaps declining financial market

prices in Europe and Japan are harbingers of this. This may be a tentative indication that further

money creation will lead to price outcomes that are entirely different to what one might normally

expect. More about this below.



Fighting a losing battle

In the past, the US and Europe had a monopoly on technological progress, as it were. This

allowed for a rapid increase in productivity. That is to say, not only did the use of modern

technology make it possible to drive up the output per employee to ever higher levels, but

the value of this output was high as well (see also our recent reports). In combination with a

sharp increase in the workforce, high economic growth therefore manifested itself in the

period after the Second World War. Growth was even so high, that more and more elements

began to be affordable that actually decelerate growth. Examples include protection of the

position of employees, high taxes for entrepreneurs, increasing regulation, artificial protection of

interest groups and businesses, all manner of social facilities and so on.

It could be argued that this caused many to begin to consider economic growth to be self-

evident. The emphasis increasingly shifted from elements to ameliorate economic growth, to the

fairer distribution of wealth. The social safety net was expanded ever wider. In reality, this meant

that, whether or not good training had been enjoyed, or whether or not efforts were made at work,

nobody needed to suffer from hunger and everybody had a roof over their head. As a result, a

minimum living standard has increasingly become a right. Without a doubt, this may be counted

among the achievements of Western society; however, this was thwarted by globalisation.

The West has gradually lost its monopoly on technological progress. This meant that the

output per employee still continued to increase, but not its value – owing to international

competition. All sorts of new products that were developed in the West began to be developed

everywhere else too in no time at all. However, the entire social security system and the design of

the economy in the West were geared towards persistent high growth. Again, this is something

that was viewed almost as an acquired right. So when growth in the West began to decline due

to globalisation, methods to keep it high were immediately resorted to. In reality, this

meant driving up debts: consuming today what still has to be earned tomorrow. However,

this is increasingly grinding to a halt in two ways:

> At some point, indebtedness becomes so extensive that too high a proportion of income

goes to interest and repayments. Too little will then remain for elements that are to

generate growth in the future. For example, training of the workforce, investments in

infrastructure and research & development, et cetera. This will automatically result in a self-

sustaining negative spiral of lower growth, an even greater chunk of income that goes to

interest and repayments, and so on.

> Due to increased competition, the living standard of large pockets of the Western

population has not improved for years. Even worse, a great divide exists between

highly-skilled and less skilled employees. The former group is still fairly adept at driving up

the value of its output, but with the latter this often even deteriorates. (To the extent that it



does increase, this may often be attributed to the use of modern/better machines and/or

technology. In this case, the rewards for this go to the capital factor and not to the labour

factor). However, as long as it was possible to borrow extensively, the damage was

limited. Nonetheless, this has become progressively difficult since the credit crunch.

This is why many do not expect what they have come to experience as self-evident – annual

improvement of their economic position – to come true. For this reason, they are

increasingly moving towards the populist parties, who tell them that cutbacks on social

expenditure are not necessary at all, and that many of their acquired rights can be preserved.

Not that they have a recipe to increase productivity – they much rather resort to

reduction of foreign competition. For example, by means of protectionism, withdrawal

from the EMU and EU, even more protection of existing jobs, et cetera. In other words,

rather than taking measures that create increased competitiveness, they aim to put in place

all sorts of protective constructions. The only problem is that the incentive to remain

competitive is removed entirely in this case, causing productivity to increase even less.

All this is taking place in a situation where, for demographic reasons, the increase in the

workforce is rapidly dwindling as well. So growth is only decreasing further, and therefore

the debt burden is becoming heavier all the time.

Debt glutton stuffed to capacity

Against the background above, it is therefore not surprising at all that so little economic

growth has been achieved via a progressively loose monetary policy. Indeed, this does

nothing to increase productivity. On the contrary, rather than implementing structural reforms –

measures that increase productivity – it merely makes it possible for many governments to borrow

more. Consider the Italians in this respect. Had interest rates been at 6% or higher now – which



would probably have been the case without the help of the ECB – Italy would have its back against

the wall now in terms of the economy. Structural reforms would be all they would be left with in

this case. This is barely getting off the ground now. The only thing that happens is the creation of

even more loans. Generally speaking, the economy would have succumbed to this a long time ago,

but the additional creation of a great deal more money has led to an increase in asset prices. As a

result, increased indebtedness is now actually offset by a higher value of assets, not because

people started earning more, but because there is inflation. However, this is not consumer

price inflation, but asset inflation. Nevertheless, as long as productivity does not increase

faster, this only comes down to a 'sticking plaster approach'. It may be compared to giving

a drug addict more and more drugs. Viewed over the longer term, this only makes the

problems worse. In this sense, this is 'fighting a losing battle'.

Central banks call for fiscal aid

The above may have been phrased in harsh words, but this is more or less how most central

bankers look at it. They wanted all manner of structural reforms to be implemented to drive

up growth. However, these reforms would actually have reduced growth initially rather than

increasing it; central bankers would have wanted to bridge this with the aid of a loose monetary

policy. However, now there is nothing to bridge. The loose monetary policy has sharply pushed

up asset prices and kept the economy afloat. As may be understood from the aforegoing,

the latter is becoming progressively difficult to pull off. The reactions from shares and

exchange rates after the recent interest rate cuts in Europe and Japan are actually clear

signs of this.

The question is therefore what should happen. We previously quoted the chief economist of

the ECB and the head of the Bank of Japan. It would by far be best if structural reforms were

finally implemented rapidly now. However, policymakers are still not ready for this. On the

contrary. In addition, most central banks have the impression it would not be wise to apply

even more monetary easing. This will probably entail more drawbacks than benefits. What

remains – despite the poor prospects for public finances due to an ageing population and

low growth – is applying more fiscal stimulus. So the public deficit has to be inflated again.

However, here too, policymakers barely take any steps to this end.

Hence, many central banks believe they still have no choice other than to hit the monetary

accelerator still harder. This is also how the chief economist of the ECB and the governor of the

Bank of Japan phrased it. The only question is whether they actually believe this should indeed

happen, or whether this was intended as a threat towards policymakers. Indeed, even more

monetary easing is fraught with risks. Asset prices would be inflated further so they become ever

more removed from their underlying economic value. This means 'bubble formation' which always



ends badly. Furthermore, it would result in a situation with even more debt accumulation and

where inefficient businesses or businesses that produce outdated products are sustained to an

even greater extent. It would also reduce banks’ profits if they supply new credit, so it might well

have an adverse effect on credit provision. Finally, it would also lead to a situation for central banks

where, if they believe it is preferable to apply fiscal stimulus now, they would in no way urge

policymakers to do so, if they continue with monetary stimulus all the time.

Ill-prepared for the next recession

Meanwhile, the central banks are increasingly beginning to wonder something else.

Statistically, most economies are due for a recession again. How to escape from this now

almost all monetary ammunition has been used? Of course, fiscal stimulus may be considered,

but it should be borne in mind that, if we entered into a recession now, this would be accompanied

with debt/GDP ratios that are at record levels virtually everywhere. In other words, this would most

probably be a very deep recession. This in itself would be disastrous for the size of the public deficit.

If fiscal stimulus were required as well in this scenario, massive deficits would occur that would

drive up public debts in no time at all. However, the possibility of collecting more tax revenues in

the future is actually diminishing, as a result of the poor growth prospects.

The conclusion is therefore that, in order to get out of the next recession, monetary aid will most

likely be indispensable. It is currently actually the case that, during a recession, interest rates

are usually reduced by 4pp to 5pp. Given the current high debts, this might well be more

now. However, there is no scope for this at all, with current interest rates already at

virtually 0%. Central banks therefore believe this scope should be created quickly. This may

be done in two ways; first of all by applying robust fiscal stimulus. However, as indicated

before, political enthusiasm for this is very limited. Assuming Hillary Clinton becomes

president, limited fiscal stimulus may be expected in the US. In Europe, countries such as Italy and

Spain may receive slightly more leeway from Brussels, but it will not amount to a great deal. Finally,

Japan has already announced a package of fiscal stimulus measures which seems enormous at

first sight but is very disappointing upon closer inspection.

Inflation as (bogus) solution

The second way would to be to ensure that inflation goes up. Interest rates would then go up

automatically as well, as a result of which a buffer would be set up against another recession.

However, how do you create inflation in the event of very low growth, overcapacity with

industry and often downward pressure on prices? In the US, this might succeed by allowing

the economy to overheat. There is a group of economists who are not in favour of this at all

because they believe US economic growth will remain close to the level of the past quarters –

approximately 1.25%. However, many economists take a different view and expect US growth to

increase to approximately 2%. Due to low productivity growth, this would be sufficient to create

further shortages on the labour market, resulting in additional wage increases. Consumers would

then have more purchasing power, as a result of which growth would increase further, and so on.



This would automatically lead to higher inflation expectations. This, in turn, would mean higher

interest rates. However, the Fed would then actually have to ensure it does not initiate a rate

hike too soon, because if it does, growth would fall back to approximately 1.25%. So the

central bank would consciously have to raise interest rates 'too little, too late'. (The technical

term for this is staying 'behind the curve'). It would have to persist with this until inflation

threatens to increase too much.

However, what if US growth still remained too low and/or far too much reserve capacity

remained outside the US to drive up wages and inflation? In this case, all that would be left

is some form of helicopter money (doling out money). However, the problem is that once

this is started, it will have to be persisted with, if the subsequent creation of a recession is

to be prevented. In addition, this is still against the law in most countries (but may be

adjusted). So this will not be resorted to any time soon, but it cannot be ruled out as last

resort. The advantage of this is also that, if there were more inflation, real interest rates

would decline, especially in the beginning. This means a transfer from creditors to debtors.

In other words, it would reduce the debt burden.

Consequences for the financial markets

If the fundamentals are considered, there is little reason for the financial markets to

become over-enthusiastic. Growth is very low in most countries, and consequently the number

of bankruptcies is increasing. Developments in terms of profits are often not favourable either

(developments in terms of earnings per share are actually favourable because so many businesses

purchase their own shares, which, incidentally, is a sign that they do not see many favourable

investment options for themselves). However, this is offset by a surplus of money. This drives

up the prices of shares and bonds with a poorer credit rating increasingly further (asset inflation).

In theory, this causes debts to be offset by a higher value of assets, as a result of which the debt

burden is progressively alleviated. In turn, the latter should boost growth. However, in reality we

see productivity growth continuing to decrease, and therefore growth prospects are not that

favourable at all. Moreover, almost nowhere is it evident that this policy, at least in the short term,

causes growth to increase significantly.



This is why the assessment the financial markets have to make is becoming increasingly

complicated. Given the poor fundamentals, many share prices and bond prices should be

significantly lower, but what to invest your money in? Even worse, more and more money

is added, which needs to be invested. So far, this has led to a hunt for returns. Holders of

capital are increasingly prepared to take risks, as long as the investment yields some return.

Hence, investments in the emerging markets and risky bonds have recently become very appealing

again. The same phenomenon is evident with exchange rates. One could counter that the lower

share prices in Japan and Europe demonstrate poor fundamentals may certainly eclipse the hunt

for returns. However:

> Investors have an increasingly global mind set nowadays. As a result, price declines in Japan

and Europe may easily be compensated by price increases in other countries or other markets.

> Investors assume that a great deal more additional money will be created by the central banks

for the time being.

Over-optimistic markets

It is precisely the latter point where the vulnerability of the markets lies. We believe the markets

currently anticipate too favourable a monetary policy.

> We previously indicated that economists are fairly divided on future US economic

growth. We understand this doubt and immediately admit that, as long US growth remains

low, the Fed will keep its foot firmly on the monetary accelerator. However, we believe that,

to start with, more fiscal stimulus will fairly soon be applied in the event of persistent



low growth. This is actually already included in the election programmes of both the

Democrats and Republicans. Not that we expect this to generate substantial fiscal stimulus,

certainly not with the Democrats, but it will still be sufficient to assist the economy to the

extent that unemployment will decrease further. However, we also believe the US economy

will remain fairly strong of its own accord, as a result of high share prices and property

prices, a significantly reduced debt burden with consumers, high consumer confidence and

shortages on the labour market. This will more than compensate for the adverse

consequences of the strong dollar and low growth elsewhere in the world. We therefore

expect the Fed to apply a rate hike as early as September, or else it will do so in

December – the better the developments in terms of employment, the more likely this

will be. In any event, we see the Fed remaining inclined towards monetary tightening

rather than easing for the time being.

> The ECB is expected to further lower interest rates and to expand/extend its bond

purchasing programme. However, it should be noted that in doing so, the central bank

would more or less use all the ammunition it has left. We believe European economic

figures are not poor enough to warrant initiation of the above, and to such an extent,

as early as next week. We anticipate limited measures; in any event, more limited than

currently anticipated by the markets.

> The same applies to the Bank of Japan and the central bank of China.

Divergence between the US and Europe

In reality, this means the following:

> We see the Fed applying a rate hike of 0.25% before too long, and repeating this two to

three times in the course of 2017. It is very important to bear in mind that the Fed

intends to allow the US economy to overheat slightly for now, rather than decelerating

it too much. The intention is for inflation (expectations) to start increasing; the rate hike

should ensure this proceeds modestly. This means that the increase in the dollar and in

credit spreads, as well as the decline in share prices, which may subsequently be

expected, will remain limited. If this were to be done too forcefully, US economic growth

will fall back too much, and higher inflation will not get off the ground at all. This is also the

reason why we see interest rates on ten-year US government bonds – now

approximately 1.6% – climbing to approximately 1.9% before the end of the year and to

2.25% - 2.5% by mid-2017.

> In Europe, we see the ECB reducing interest rates further by a maximum of 0.1pp and

shortly announcing it will continue to purchase bonds until September 2017. In other

words, limited further easing of current monetary policy. If we are proved right that US

long-term interest rates will increase, interest rates on ten-year German government

bonds – now approximately -0.07% – will be inclined to increase in tandem. However,



the policy of the ECB works precisely in the opposite direction, but the markets are

likely to have actually taken this into account too much rather than too little. This is

why we expect ten-year German interest rates continue to fluctuate between

approximately -0.2% and 0.3% for the time being, while they are inclined to move

upwards within this range. Only later, when a great deal more fiscal stimulus is applied

in Europe, whether or not combined with a form of helicopter money, do we see ten-

year German interest rates really ending up in an uptrend.

> As we indicated before, we see the dollar gradually becoming stronger as a result of the Fed’s

policy. In addition, we see the euro weakening in the period ahead due to the ECB’s policy. We

still expect EUR/USD to decline to approximately 1.0 if not below this mark in the coming

quarters. A decline below 1.11 and subsequently below 1.09 would actually give off a

confirmation signal for this from the perspective of a technical analysis of charts. How soon

this will happen strongly depends on how the US economy will develop further. Growth over

the third quarter appears to amount to approximately 3%, but this may just concern a

correction to the very low growth during the preceding quarters. If growth were to weaken

again soon, EUR/USD may easily increase to 1.15 – 1.17 first (an increase above 1.13

would indicate this). However, if the US economy is aided by more fiscal stimulus, we expect

EUR/USD to still commence the aforementioned decline. Nevertheless, we wish to

emphasise that we have a more positive view of the US economy and therefore

anticipate there will be so much upward pressure on US interest rates that EUR/USD

will commence the expected further decline as early as now.

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> Some analysts view the narrow bandwidth within which the S&P 500 index has moved

recently – whether or not after an initial decline to approximately 2,100 – as a

springboard to higher levels. Most of them anticipate a further uptrend of the index on

balance, with ultimately a target of approximately 2,450, by the end of 2017/beginning of 2018.

However, we are actually inclined to regard the limited recent price movements as a

rounding top. We no longer expect the index to far exceed 2,210, and we see US share prices

declining before too long as a result of monetary tightening by the Fed, less monetary easing

elsewhere in the world than currently anticipated, a stronger dollar and consequently

increasing problems with the massive dollar debts in the emerging markets. However, we

basically do not expect a rapid fall in prices either. Monetary policy will remain too loose

for this for the time being. We do not expect the index to decline by more than 10% to 15% in

the coming quarters. However, a spanner in the works may be the possibility of the situation

in Europe getting out of hand. We do expect more and more downward pressure on prices

in the course of next year. In tandem with increasing inflation expectations, additional

Fed rate hikes will be anticipated.

> The looser monetary policy in Japan and Europe should theoretically ensure that shares

in these areas perform better than those in the US. However, too much may go wrong

in Europe in the period ahead to speculate on this on a large scale. The same applies to

Japan, because we doubt whether the Bank of Japan indeed still has a great deal of scope for

further stimulus. This is why the climate for the emerging markets remains the most

favourable, as long as the Fed does not raise interest rates soon. However, the fact

remains that we anticipate persistent upward pressure on US interest rates and the dollar, so

that for investments in the emerging markets too, we anticipate they will not perform far

better than those in the US.

> Finally, we still believe that inflation will increasingly be pursued worldwide in order to

keep the debt burden bearable. Hence, we believe investors should continue to shift

their portfolios towards inflation hedges (for example precious metals, TIPS, property,

all manner of other real assets, commodities and suchlike). However, we believe it is

preferable to put this on hold until the Fed has taken the next step in terms of interest

rates. This may place inflation hedges under significant downward pressure for quite a

while, compared to other investments.

global macro economic outlook · 2016. 9. 5. · ecr research bv | | thursday, 1 september 2016 | 2...

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