Divergent perspectives

In Short

Amid a volatile winter, global markets staged a buoyant start into the new year. Just after the Fed and ECB had poured cold water on pivot hopes before Christmas, weaker inflation prints rekindled the bulls. Warm weather and energy savings have been dissolving fears of a European energy crunch, with hard year-end data proving surprisingly resilient and business expectations bouncing. China’s surprise Covid Uturn and relaxed property regulation will make for a buoyant local spring recovery.

Highlights:

  • With the energy crunch easing and China heading for a reopening bounce, the euro area will likely forego a widely anticipated winter recession. Yet the Fed’s fast monetary tightening is still to take its toll of a shallow US mid-year recession.
  • These divergent shifts in the outlook support a tighter transatlantic yield spread, a slight preference for EA vs. US stocks and more upside for the EUR/USD.
  • Overall, however, elevated valuations and persistent headwinds to earnings keep us favouring a prudent stance on risk assets amid mounting sings of exuberance. Euro area IG Credit still looks attractive.

 

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