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CROSS ASSET WEEKLY
14.12.2018

Will the Fed meet markets halfway?

Summary
Chairman Powell is expected to deliver another rate hike next week. But he will have to walk a tightrope given the recent market developments. The fall in some measures of inflation expectations and softer global growth should allow for some more dovish comments. This could be reflected in the Fed’s new dot plot too, with a median forecast of two hikes in 2019. Still, the re-pricing of fed funds futures appears too extreme as the US economy should continue to grow above trend. What’s more, the slight inversion of the US yield curve up to 5 years is not uncommon in a late cycle environment and does not automatically indicate that the current cycle is about to end.
In Europe, the ECB has ended its net asset purchases of bonds but will continue to reinvest the proceeds of maturing securities for an extended period of time and beyond its first interest rate hike. Risks to the economy are still seen as balanced, but tilted to the downside. Still, the undertone of the ECB’s statement remains constructive with only slight downward revisions to its growth and inflation forecasts. Importantly, the longer-term projections point to a current monetary stance in line with its objectives.
The valuation of Chinese equities looks more attractive after a negative 2018. Yet waning economic momentum, deteriorating liquidity conditions and effects from the US-Chinese trade war caution against stepping in too early. We would look for better entry points into Chinese equities in 1H 2019.
Finally, the Turkish economy contracted in the third quarter and the early indications are that it fell into a technical recession in Q4. With a quick recovery unlikely in 2019, stress in the financial system could still weigh on bank credits


This week’s highlights
European Macro
ECB ends asset purchases and extends forward guidance
US Macro
The Fed to meet markets halfway?
Fixed Income
Late cycle yield curve dynamics in the US
Chinese Equities
The Huawei spat complicates things further  
Emerging Markets
Turkey probably fell into recession in H2 2019
Economic Calendar
Week of 17/12 – 21/12/2018
Market Performance
Global Markets in Local Currencies