Global growth and tighter policy to keep risk assets under pressure near term – Danske Bank

Economists at Danske Bank expect the global expansion to continue but at a slower pace in coming years in light of a maturing global business cycle, but macro data have disappointed lately, raising growth concerns and weighing on risk assets.

Key Quotes

“Our quantitative business-cycle model now signals that the global economy is likely to remain in the so-called ‘red quadrant’ (cyclical downturn phase) for longer. This is not usually an attractive environment for FX carry trades. However, there is a risk of a ‘tail wagging the dog’ effect, i.e. when sentiments indicators stabilise, so might confidence indicators and growth. Thus selective carry may be attractive.”

“We note that FX carry trades tend to perform in the so-called ‘blue quadrant’ (recovery) and suffer in ‘red’. Still, this year, the G10 carry space has performed relatively well, due mainly to a strong dollar performance.”

“We reckon that, in absence of a more severe deterioration of risk appetite, G10 carry could continue to do well in the coming months on the back on continued USD support – even if our fundamental view is that USD overvaluation should eventually reverse.”