Across the globe, securities markets and business surveys are registering rising optimism and falling global risk for investors, the Wall Street Journal reports. Among the positive signs: a rebound in oil prices, improving economic growth in China and Europe, slowly rising inflationary expectations and moderate increases in interest rates.
On the political front so far, President Donald Trump’s tough talk on trade has not produced actual protectionist measures, the Journal notes. Instead, his focus has been on regulatory rollback and fiscal stimulus, initiatives that are likely to have positive spillover effects abroad. Indeed, Trump has made positive comments about U.S. trade with Canada and Japan, and talks are reportedly underway to strengthen trade ties with the U.K.
Halting Deflationary Trends
Until recently, many investors and economists feared that economically destructive deflation was on the rise amid depressed major commodities prices and central banks' effort worldwide to push interest rates to near-zero or negative levels to provide stimulus, the Journal notes. That view is changing. As deduced from rising bond yields, investors are now projecting annual inflation between five and ten years from now to be about 2% in the U.S. and Europe, and about 0.6% in Japan. All these figures are roughly 0.5% above where they were in July, the Journal says.
A major contributor to increased inflationary expectations has been the rebound in oil prices, the Journal observes. After falling below $30 per barrel last year, oil prices have risen above $50 since OPEC members agreed to cut production in the fall.
Improved Economic Outlook
The global economy will grow about 3.4% in 2017. Independent investment banking advisory firm Evercore ISI sees 11% nominal GDP growth (on an annualized basis) in China for the first quarter, up from 7% in the same period a year ago. Finally, private equity firm Carlyle Group sees strength in Europe from stable domestic economies and a pickup in exports.
Strengthening economies and a halt in deflationary trends are giving central banks the confidence to curtail bond buying and thus allow interest rates to rise, the Journal adds in its February 15 story. This is particularly good news for banks whose profit margins have been hurt by low rates. (For more, see also: Bill Gross: QE is "Financial Methodone.")
The economic skies are far from clear. Economic growth in China has been fueled, in part, by a rapid expansion in debt. Whether this is a bubble ready to burst is a concern for investors, the Journal says. While consumer spending in the U.K. has not been affected by the Brexit vote, the outlook for France is unclear if the anti-euro National Front captures the French presidency. Finally, Trump's economic success may depend on to what extent he succeeds in implementing tax cuts and stimulus spending instead of disruptive protectionist policies.