A Goldman Sachs Portfolio Strategy research piece says financial conditions have tightened in all markets owing to the global "risk-off"

  • The recent 'risk-off' in global equity and credit markets coupled with the appreciation of DM trade-weighted currencies has further fueled concerns over global growth and deflation.
  • Up until June this year, there had been a significant divergence in financial conditions, with those in Europe and Japan easing and the US seeing a tightening, mainly because of the stronger trade-weighted US$ and a weaker euro and yen (Exhibit 3)
  • This had been a market-friendly development, boosting European and Japanese equities.
  • However, since June 2015, financial conditions have tightened in all markets owing to the global "risk-off" and there has been a significant appreciation of euro and yen trade weighted currencies, driven by the RMB devaluation coupled with broad EM FX weakness.
  • This simultaneous tightening in the US, Europe and Japan means there have been no relative winners recently.
  • And while the domestic recoveries in Europe and Japan remain strong, we think weaker currencies will be required to dispel global growth and deflation fears and for those equity markets to do well.

(Bolding mine)

Note .... a summary of their views (bolding mine)

  • There is value in equities owing to a high ERP and an expected pick-up in earnings growth, in our view - we are looking for entry opportunities and remain overweight equities on a 12-month horizon. Further easing from the ECB and BOJ in October coupled with a weaker euro and yen could serve as a strong catalyst.
  • We are also waiting for volatility to ease and for more visibility on the Fed lift-off and China/EM growth stabilization, as well as the impact on global growth.
  • Think the drag on global growth due to China will be limited, in our view, but market perceptions may differ until macro data stabilizes.
  • We see limited return potential for government bonds over 12 months, and remain underweight; on a 3-month basis, however, we remain neutral, as deflation concerns linger and there is potential for further easing from the ECB and BOJ.
  • We stay underweight commodities on both a 3- and 12-month horizon as our commodities team has lowered their oil price forecasts.
  • We think the stronger dollar trend will resume, especially if the ECB and BOJ step up easing efforts, which should support our bullish 12-month view on European and Japanese equities. As we expect the euro and yen to weaken materially in the process, we believe investors need to hedge currency exposure. But in the near term, we remain concerned about equity and FX volatility.