Benign market conditions are set to continue, predicts Barclays

Euro area and Japan set to grow on the back of falling energy prices, a resurgent dollar and loose monetary policies

The benign market conditions that we have enjoyed over the past two years are set to continue, according to Barclays.

Research by the bank entitled Global Outlook: Oil, the dollar and monetary policy claims that failing energy prices, the resurgent US dollar and the continuing loose monetary policies of central banks are good news for the world economy.

“The plunge in oil prices reduced inflation even further and encouraged additional monetary easing,” said Larry Kantor, Barclays’ head of research.

The surge in the US dollar has been “largely constructive” for the global economy, Barclays claims, because it redistributed growth and inflation from the US – where excess capacity has shrunk and monetary policy is set to tighten – to the euro area and Japan, where there is still ample excess capacity and deflation is a greater threat.

Barclays noted that lower inflation and a stronger US dollar also mean that the US Federal Reserve can be more cautious about raising rates than it would otherwise have been, which will allow the markets to continue to perform well.

Among developed economies, the euro area and Japan should be clear beneficiaries of the benign conditions, Barclays said, because they will gain from lower oil prices, weaker currencies and extreme monetary support. The bank predicted that stocks in those regions would continue to outperform. It also highlighted that emerging Asia had benefited from recent market changes, central bank interest rate cuts and still-strong global technology demand.

But Barclays warned that not all countries and regions are managing to take advantage of the current market environment. It highlighted that China has resisted currency depreciation and has continued to “rein in credit expansion and excessive investment, placing downward pressure on its economy”.

It also noted that Latin America, where many countries export commodities, has suffered from the weakness in commodity prices as well as capital outflows due to the strength in the US dollar and the anticipation of US Federal Reserve interest rate hikes.

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