The market is in danger of misjudging the Fed – Deutsche Bank

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“While the fundamentals of the global economy remain strong, the resurgent trade war is shaking markets,” note Deutsche Bank analysts.

Key quotes

“There is also the possibility of further escalation by the US or a more combustible retaliation from China, either of which would further inflame tensions and elevate risks.”

“Apart from the trade war, economic fundamentals are actually developing more positively than many expected this year. China’s economy grew more than forecast in the first quarter, and forward-looking indicators of European activity have steadily risen from their recent troughs. The US labour market remains the envy of the world, with wages continuing to rise and the expansion set to continue at a solid pace.”

“Two other risks are worth watching. First, Brexit developments have deteriorated over the last month and the odds of a general election have risen further. Second, we think the market is in danger of misjudging the Fed. Next year, pricing looks fair given the balance of risks, but the bar for a near-term cut is higher than many realise.”

“Taking these views in aggregate, we continue to structurally favour US equities and are more neutral on rates. However to get a trade deal we may need some pain in equities first to focus minds. In currencies, we expect the Chinese yuan to depreciate as a result of the renewed trade war.”

 

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