The monetary policy of several global central banks has reached inflexion point alongside the looming possibility of global trade wars, according to a City commentator.
In a note to clients, Abi Oladimeji, CIO at Thomas Miller Investment, wrote that beyond shorter term dynamics, the medium term global economic outlook has become clouded by the risk of a trade war between the US and its major trading partners.
"At this point, it remains unclear how the trade disputes will pan out but the risk to the global economy and financial markets from an outright trade war could be significant. This introduces a notable negative skew to the range of possible outcomes for the global economy in the months and years ahead."
That said, it should not derail the possibility of rate hikes by the Bank of England (BoE) and US Federal Reserve in the near term, Oladimeji opined. In the UK, recent surveys conducted by Markit/CIPS have provided evidence the economy has rebounded in recent months as data on manufacturing, construction and services all strengthened in June.
"The rebound has eased concerns about the UK economic backdrop and raised expectations the BoE may finally be able to increase interest rates for the first time this year when it next meets in August.
"Meanwhile, in the US, the resilience of economic activity, demonstrated by a strong labour market and an uptick in inflation has boosted expectations of two further hikes in interest rates by the Fed this year.”
Overall, Thomas Miller Investment's assessment of the balance of macro risks and opportunities leads it to a neutral stance on the major asset classes relative to longer term strategic allocation.
"Policy uncertainty is higher than typical and monetary policy appears to have crossed an inflexion point with quantitative tightening and interest rate hikes in the US looking likely to be followed elsewhere. This, in addition to ongoing trade uncertainties, looks set to drive market volatility during the low-volume summer months."
Switching tack to equities, Oladimeji said global markets were clouded by growth and policy uncertainties. "Our overall equity position is neutral and we have now also moved to neutral weights across the main regional markets. Equity market outlook is clouded by weakening growth momentum, risk of trade war and less accommodative financial conditions.
"However, equities continue to be supported by strong earnings which have helped to reduce multiples to normal levels."
