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JPMorgan Global recession - Unsustainable excesses built up since the global financial crisis will ultimately have to be unwound it warns.

Apr 30 '16 | By La Afrique Media | Views: 352 | Comments: 0


One of the key findings from JPMorgan Asset Management’s recent Global Fixed Income, Currency & Commodities Investment Quarterly review is that in the short term, accommodative monetary policy provides market stability but in the long-term a recession is coming.

“Our March meeting took place following several months of extreme risk-off/risk-on market sentiment and a dovish reaction from the Federal Reserve,” writes Robert Michele, JPMorgan’s chief investment officer and head of global fixed income. “Such an environment naturally begs the question: ‘How near is the next recession and what could trigger it?’”

He continues: “A global growth slowdown is certainly under way. Developed market growth is close to trend, but is being dragged down by slowing, below-trend growth in the emerging markets. But a global recession, while inevitable, is not imminent. Short-term tailwinds from extremely accommodative central bank policy should help keep a global recession at bay and provide the liquidity to support risk assets in the near term.”

Michele adds: “However, the probability of recession will increase through 2017 in the face of longer-term headwinds from the unwinding of ‘unsustainable excesses’ (especially emerging market leverage) amassed since the global financial crisis.”

Short-term supports

A key element of that supportive environment is the ample liquidity provided by central banks around the globe.Extraordinary easing by the European Central Bank includes negative interest rates and asset purchases, while the Fed’s inaction is a form of easing – signalling its willingness to be behind the curve rather than potentially contributing to market volatility.

JPMorgan expects, at most, only a single US rate hike in 2016 and see the 10-year Treasury as range-bound between 1.75% and 2.00%. (10-year USTs currently yield 1.825%).

“Near-term stabilisation in China, supported by increasing infrastructure investment and helped by a weaker dollar, should limit imminent risks.”

Long-term detractors

Nevertheless, JPMorgan see recession as inevitable. Along with weaker productivity and aging demographics that are dragging down global growth, “unsustainable excesses”, built up since the global financial crisis, will ultimately have to be unwound.

“It’s not the US sub-prime market this time, it’s emerging market leverage. The adjustment will be painful. Among the excesses: high levels of non-financial private sector credit and gross fixed capital investment in China and, in the US, over investment in shale oil. Additionally, the banking industry will have to continue shrinking its way to profitability,” writes Michele.

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