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Market sentiment continues to be very negative. The dominant view is that the global cycle is nearing its end and that there are significant risks that could make the situation considerably more complicated going forward. We, however, continue to believe that there are sound reasons to expect global growth to remain healthy during 2019.

Despite all the noise (Italy, Trump’s trade policy, emerging markets, etc.), the global economy’s reflation process continues and will become more and more evident. Long-term interest rates are therefore going to have to move upwards significantly. In terms of other issues, although we still think that the tightening of global financial conditions can take place in an orderly manner, the fact that overheating risks in the US continue to edge up increases the likelihood that we will experience volatility in the markets.

Despite all the talk about geopolitical risks, the outlook for the global economy continues to be positive: the US is very strong, the European slowdown seen during the first months of the year has been temporary (see, for example, the May employment data) and most emerging economies have solid foundations. Even though spare capacity is being eliminated somewhat quickly and upward pressures on prices and wages are becoming increasingly evident, markets remain convinced that we live in a world with very little inflation, where interest rates are set to remain low permanently.

Up until the Summer of 2016 it was mostly negative views about the world economy that dominated market sentiment: many thought that the Chinese economy was going to decelerate abruptly sooner rather than later; the US economy seemed poised to enter recession because of the problems related to the energy sector; Brexit was seen as the first step that would end up leading to the collapse of the European Union; secular stagnation seemed to be the name of the game, meaning that the global economy appeared to be stuck in an equilibrium of very low growth and with aggregate demand remaining structurally weak and unable to create any kind of inflationary pressure…

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