The House View:Happy holidays

Happy holidays. This is what market sentiment feels like at the moment, with riskassets at or close to multi-year highs. Faster progress on tax reform bills in the USand the EU-UK exit deal provided the last positive catalysts. They add to a favourablebackdrop of strong economic growth, increasingly supportive fiscal and regulatorypolicy, and tightening but still easy monetary policy.

    The positive environment should extend in 2018. The global economy should expandat a strong pace, with the US and eurozone growing above potential, and Chinaslowing down but only moderately. Political risk, though still present, shouldn’tescalate. We expect central banks exit from ultra-accommodative monetary policy tocontinue very gradually. As a result we are generally constructive on risk assets.

    What could challenge this positive undertone? A sharp rise in inflation for starters.

    Despite strong growth and tight (or tightening) labour markets, developed marketsinflation remains low, and markets have gotten used to this. There are howeverincreasing signs that inflation will continue rising in 2018. A faster than expected pickupcould surprise markets and lead to a sharp repricing of central bank rate riseexpectations, which could be disruptive for risk assets