Global Asset Allocation: The View From EMEA

Yoram Lustig , Head of Multi-Asset Solutions, EMEA

It’s The Central Banks, Stupid!

Global manufacturing data continued to sow doubts on the outlook for economic growth as the impact of lingering trade uncertainty on corporate sentiment became more pronounced. Data have continued to weaken over the first half of the year with the global manufacturing PMI falling below the expansion threshold in June, marking the lowest level since February 2016. Weakness was broad‑based with the headline number and new orders falling in all regions. Despite these persistent signs of a weakening global environment, markets seem confident that central banks will provide a backstop. So far, central bank rhetoric has supported markets, but, if needed, will the response be sufficient to reverse the economic trend?

Synchronized Pivot

Macro risks remain to the downside as business sentiment and global capex have been adversely impacted by trade uncertainty, leading expectation for central bank easing to become increasingly synchronized. Following the pivot by the Federal Reserve, recent comments from European Central Bank (ECB) President Mario Draghi increased expectations that monetary easing would be forthcoming in the eurozone, and Australia has moved to an easing stance. This could be good news for emerging markets as dovishness in developed markets and signs that the U.S. dollar strengthening trend may have peaked would provide cover to cut rates amid still‑low inflation.

Truce, But Not Real Progress

While expectations for the meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the G‑20 summit were low, the resulting truce is a positive development following months of escalating tensions. But will it be enough to support markets from here? Risk assets had already rallied strongly year‑to‑date on the back of dovish comments from the Fed and the ECB, with U.S. equities posting the best start to the year since 1997. However, the recent strength of safe‑haven assets such as gold and sovereign bonds raises some concerns. While the truce avoided further escalation, the core issues (e.g., intellectual property) remain unresolved. Markets rejoice in the detente, but there are no clear signs that the trade war is over.

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