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Amid banking turmoil, outlook for “risky” assets seems bleak

The recent turmoil in the global banking sector have sent ripples through financial markets. So far, a full-blown financial crisis doesn’t seem likely to us, although clearly any escalation would add to risky assets’ worries.  But even if that is avoided, we suspect credit will contract as banks’ appetite for lending diminishes; that in our view, will further weigh on economic growth anyway. That adds to the reasons to think that “risky” assets – which still don’t seem to us to be braced for much of an economic slowdown in developed markets (DMs) – will struggle over the next few months. And even if growth continued to hold up better than expected, that would probably prompt a sharper response from central banks that would limit any gains in risky assets anyway. Meanwhile, we think the rally in “safe” assets has a bit further to run, in general, as inflationary pressures ease (aided by slowing growth) and as central banks in both DMs and emerging markets (EMs) turn dovish. 

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