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According to Simon Murray, Research Analyst at Westpac, the formerly clear skies of the synchronised global uplift have become shrouded by concerns that the growth trajectory will become somewhat more bumpy.

Key Quotes

“Tariff drama dominates the headlines, European politics are again heated, and investors are fleeing from emerging market assets. Meanwhile, the US Federal Reserve continues to gradually normalise policy. Higher yields and reduced liquidity present a new paradigm and markets are still adjusting to tighter conditions.”

“The first thing to note is that the pace of global growth already looks to have crested. Q1 GDP results show the distribution of growth in advanced economies has become increasingly bi-modal.”

“Emerging economies generally posted solid economic results in Q1. However we are now seeing an unwind of yesteryear’s carry trade – borrowing cheaply in the US to invest in higher yielding markets. The result is a sharp depreciation of emerging market currencies and equity weakness, particularly for those countries with current account and fiscal deficits.”

“Needless to say, an escalation in the ongoing trade saga also lingers as a significant risk to global activity.”

“In addition to the trade situation, Europe is facing internal political disputes. The new Italian far-left and far-right governing coalition is pushing towards wider fiscal deficits and a greater aversion to the Euro currency. In addition, migration is back as a contentious issue. While last week’s EU summit ended with a deal, detail is scarce.”

“Markets are justifiably sensitive to these recent dynamics. Large moves have generally been contained to specific countries but an overall risk-off sentiment pervades.”

“In the same respect, we note that downside risks are accumulating with the branches of future scenarios growing thicker, wider and more lop-sided.”