Macroscope | US-China trade talks could seal the deal for investors looking for reasons to be optimists

Expectations are riding high, with economic signals remain extremely mixed. Global policymakers are erring on the side of caution. The US, China, Europe and Japan have been showing clear signs of losing momentum, forcing a change of tack from policymakers to stem the tide. Hopefully it will be enough to hold the line.

The US Federal Reserve has put tightening on hold, Beijing is stepping up efforts to boost recovery, the European Central Bank says it could renew its stimulus efforts, while the Bank of Japan is under pressure to ease yet again. It’s a reflection of a global economy which has become overdependent on perpetually cheap and easy credit, creating a central bank dilemma which could last for decades.

On the bright side, there are glimmers of hope that a global hard landing can be thwarted. US data is confounding speculation that the US is slipping towards recession. March brought the best retail sales data in a year-and-a-half while the US labour market stands at its strongest level for half a century. US treasury yield curve flattening has persistently hinted at harder times ahead, but the odds are the signals are misleading. The US economy seems to be doing much better than OK.

Meanwhile China’s economy has been doing better than expected, with the first-quarter growth numbers coming through at 6.4 per cent, higher than the 6.3 per cent anticipated by market forecasts, raising hopes that the economy might be stabilising. It’s too early to say recovery has turned the corner but it’s a sign that stimulus efforts are beginning to have a positive effect.

Stock market expectations are clearly riding high, with the MSCI World equity index currently at 2,160 and homing in on last year’s 2,248 all-time peak, despite more challenging fundamentals implied by gloomy-looking global leading indicators. Hopes that US-China trade frictions and US interest rate tightening could both soon be over have been at the root of the rally. But more progress is needed on both fronts for the stock market optimism to extend.