Skip to main content

You are here

Blog Listing Page

Slowing global growth likely to test risk appetite

By Philip Lawlor, managing director, head of global market research

Fear of US Fed overtightening was a major catalyst behind the global market spasms late last year. The good news is that financial conditions have broadly loosened since then, particularly in the US, bringing relief to nervous markets and powering the recent risk rally.

As we highlighted in our latest report on the global equity markets, the multi-metric FTSE Russell Financial Conditions Indicator (FCI) score for the US declined to 3.3 in February from a peak of 3.9 in November, while scores of other major markets have also fallen (see chart below).1

We view FCI scores of around 3 as a neutral reading, while those above 4 signal tight conditions.


A major reason for the broad FCI declines was the pullback in market interest-rate expectations, as implied by 12-month-forward overnight indexed swap rates (see chart below). The drop was particularly pronounced in the US. The narrowing of US corporate bond spreads and the softer US dollar also helped bring down the US FCI score.


The downturn in rate expectations comes as several major central banks join the US Fed in putting their tightening agendas on hold amid mounting threats to the global growth outlook. This wariness has been reinforced by the recent round of cuts to 2019 consensus GDP and inflation forecasts across the major economies, which had already been anticipating a significant slowdown from 2018 levels.

Year-over-year GDP growth is expected to fall most steeply for the Eurozone (especially Italy) and the US in 2019 − although the US growth rate is still seen exceeding that of the Eurozone by one percentage point. Nonetheless, current estimates suggest that fears of a 2019 recession are premature (except in Italy). 

As indicated by our newly introduced Economic Data Barometer (EDB), which tracks positive and negative surprises across a wide range of reported economic metrics and regions, disappointing macro news has been the norm for the past year (see chart below). Although somewhat improved recently for the US and China (albeit still in negative territory), the EDB score has deteriorated markedly for the Eurozone.


Lower GDP growth and inflation would mean lower nominal GDP growth, which has been a reliable proxy for revenue growth. Indeed, consensus 2019 forecasts look for revenue growth to drop by nearly half for the Russell 1000 and Russell 2000 Indexes, to slow even more sharply for Asia Pacific ex Japan and to turn negative for the UK (see chart below). 


Lower revenue growth, in turn, implies stiffer hurdles ahead for operating leverage and, in turn, risks to earnings forecasts. These are classic late-cycle economic signals. History suggests that it may be time to employ a “top-down” approach to modelling the future trajectory of earnings rather than relying on “bottom-up” analysis, which have typically been slow to respond to macroeconomic turning points.



To gauge the extent of changes in financial conditions across the regions, we use a Z-scoring methodology that compares the current reading of each variable against its longer-term average, measuring these divergences in terms of standard deviations, which are clustered into bands 1 through 5.



© 2019 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”  and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent,  FTSE FI, YB.  FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell indexes or research or the fitness or suitability of the FTSE Russell indexes or research for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell indexes or research is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this blog or links to this blog or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this blog or accessible through FTSE Russell indexes or research, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB, and/or their respective licensors.

Blog Listing Page