Europe

Europe did not witness a major policy reversal. Inflationary pressures are coming down, enabling the ECB to cut rates and European states to maintain soft budgets. Geopolitical challenges ensure that European parties continue to cooperate on national defense, economic security, and energy security.

The ECB is now firmly in easing mode, even if it refuses to pre-commit to a specific rate path. What does this data dependency mean for the euro and European yields?

The US economy is in the “Overheating” phase, so stronger growth brings higher inflation. Tight monetary policy means recession is still likely over the next 12 months. Stay defensive.

European stocks have massively underperformed US ones since the GFC. Demographics and productivity say this trend will continue, but is that really so?

In Section I, we argue that global investors have been lulled into a false sense of security concerning the resiliency of the US economy. Tight monetary policy means that something must change for a recession to be avoided, and developed market rates cuts will likely be too modest and come too late to save the day. Nimble investors or those highly sensitive to tracking error should not be underweight stocks over the coming 3-6 months. Over a 6-12 month time horizon, we continue to recommend that investors remain underweight global equities versus US$-hedged long-maturity developed market government bonds. Section II is a guest report written by Martin Barnes, BCA’s former Chief Economist. Martin revisits the idea of the Debt Supercycle and discusses how its true end may emerge in response to a fiscal crisis in the US over the coming few years.