Dr Doom: As stocks party, economies get worse

This past May and August, escalations in the trade and technology conflict between the United States and China rattled stock markets and pushed bond yields to historic lows. But that was then: since then, financial markets have once again become giddy. US and other equities are trending toward new highs, and there is even talk of a potential “melt-up” in equity values. The financial-market buzz has seized on the possibility of a “reflation trade,” in the hope that the recent global slowdown will be followed in 2020 by accelerating growth and firmer inflation (which helps profits and risky assets).

The sudden shift from risk-off to risk-on reflects four positive developments. First, the US and China are likely to reach a “phase-one” deal that would at least temporarily halt any further escalation of their trade and technology war. Second, despite the uncertainty surrounding the United Kingdom’s election on December 12, Prime Minister Boris Johnson has at least managed to secure a tentative “soft Brexit” deal with the EU, and the chances of the UK crashing out of the bloc have been substantially reduced.