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State Street Comments On The 2018 Market Outlook

State Street Corporation announced today its market outlook for 2018. It believes the year ahead will bring optimism in support of risky assets. However, while the markets’ Goldilocks-like growth appears to be in good shape, 2018 could warrant a degree of caution.

“Many hope the Goldilocks economics of robust global growth and modest inflation will produce another bumper year for financial markets, but it will likely be more challenging,” said Tim Graf, head of Macro Strategy for EMEA at State Street Global Markets. “Investors have been accumulating risky assets for more than a year now and despite higher expectations, in some areas risk premia and volatility are alarmingly low. Economic recoveries are a year older, output gaps are closing and central bank support will likely begin to wane; meaning high levels of caution should be taken this year, alongside the optimism that characterised much of 2017.”

“In Europe, the inflation outlook changed for the better in 2017, but not as much as hoped, with our online inflation measure, PriceStats1 ending the year at 1.3 percent,” continued Graf. “While the Eurozone continued to surprise on the upside for most of 2017, core inflation has not responded; and as the output gap is expected to close in 2018, the expectation remains that core inflation will accelerate eventually. Our analysis indicates this is beginning to be embedded in market inflation expectations, which are drifting higher. However, for the moment at least, the current inflation trend is offering little evidence to back these hopes in spite of better growth.”

“After years of expansion, 2018 still looks set to deliver some solid economic growth,” added Antoine Lesné, head of EMEA strategy and research for SPDR ETFs. “Tax reform in the US could stiffen inflation, but the base case remains to not bet against bonds. While liquidity continues to be abundant, central banks are gradually withdrawing their support. This may start impacting credit later down the road, but for now risk assets are expected to continue to do well until gross domestic product (GDP) peaks globally. This year may present another opportunity for risk assets as persistent market anomalies continue to belie stronger fundamentals; but investors should consider gradually building caution into their portfolio.”