Global Risks Begin to Recede


Greg Ip, MarketWatch

Feb. 15, 2017


It’s tempting to see surging U.S. stock prices and business confidence as all coming in response to President Donald Trump’s election.


But the upswing is global: In Europe, Japan, China and elsewhere, business surveys and markets have turned markedly more optimistic.


This is partly because investors hope that any fiscal stimulus Mr. Trump enacts will spill over to other countries. Yet a confluence of other factors is also at work: Oil prices are on an upswing thanks to production cuts by the Organization of the Petroleum Exporting Countries. Chinese and European economic activity picked up in the second half of last year. And, economically speaking, populism has so far been a wet firecracker.


“It’s a mosaic,” said Ed Hyman , chief economist at Evercore ISI, a brokerage firm. “Trump is the most discussed part of the mosaic but not necessarily the most important part.”


 few weeks after Mr. Trump’s election, OPEC agreed to cut production and its member countries have largely abided by their pledges. Oil prices, which fell below $30 a barrel a year ago, have remained above $50 since the agreement. As a result, the number of oil and gas drilling rigs operating in the U.S. has jumped 80% since June, according to Baker Hughes, an oil field services company. Oil and gas field machinery production is up 10% since August.


 Firmer energy prices have pushed actual and expected inflation higher. U.S. inflation hit a five-year high in January. Ordinarily that’s bad, but it is now welcomed by central bankers who worried that too-low inflation can easily become destructive deflation. In mid-July bond markets expected inflation in five to 10 years’ time to average 1.2% in the U.S., 1.4% in the eurozone, and 0.1% in Japan. Those figures have since jumped roughly half a percentage point.


Mohamed El-Erian, an adviser to the German insurance company Allianz /quotes/zigman/143069/delayed ALIZF -0.41% , thinks the OPEC agreement will likely keep oil between $50 and $60 a barrel. He said that plus hopes for fiscal stimulus under Mr. Trump and a Federal Reserve continuing to err on the side of raising rates too slowly, rather than too quickly, are why expected inflation has risen.


Global growth is also on a firmer footing. A year ago, as China struggled to stem surging capital outflows and a weakening currency, an index of economic activity compiled by IHS Markit /quotes/zigman/74144744/composite INFO +1.08% slipped into contractionary territory. Then Chinese authorities encouraged banks to crank up lending and clamped new controls on capital outflows. By December, the borrowing boom had driven the index to nearly a four-year high.


Evercore ISI projects annual growth in nominal Chinese gross domestic product—economic growth plus inflation—will reach 11% in the current quarter, up from below 7% a year earlier. This growth traditionally has correlated closely with oil and industrial prices.


Even Europe shows signs of shaking off its torpor...