Sol y sombre

Growth in the global economy will initially be quite powerful over the first half of 2014, driven by the US, Japan (until May) and the UK, plus there will be some catch-up of EMs to DMs as this demand washes through. The Eurozone will continue to lag even if this is dressed up as a recovery in policy circles. But this will be enough to keep equities attractive. It should also allow core bond yields to normalise, albeit with a lag. This backdrop will also raise questions over the credibility of forward guidance with relevance for central bank control (which they will lose) over long-term rates. This backdrop presents risks for later in the year given that leverage has not been reduced globally. Emerging markets will stay vulnerable, specifically those that lack the spine to pursue meaningful reforms. This might also apply to Japan where PM Abe’s third arrow remains in the quiver and the consumption tax hike will derail the pick-up in domestic demand. Debt sustainability also remains a risk for the Eurozone. Only a weaker currency can help.

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