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Signposts on the road to decoupling

European and US equity markets have mirrored each other for years but macro trends could force a decoupling over the next two years. ABN Amro strategists see several factors paving the way for this. The first is that productivity growth in the US and Europe has passed an inflection point. The US has experienced two years of strong productivity growth, but the rate is unlikely to be sustainable. European productivity still has room for improvement.

The second factor is the downturn in the global trade cycle. This will put pressure on US exports and US growth and discourage further rate rises, which would reduce expectations of growth in returns on US assets. This would reduce the fundability of the US current account deficit and add to downward pressure on the dollar.

In Europe, particularly Germany, the downturn in the trade cycle and the euro's appreciation against the dollar will hurt growth, forcing further restructuring.

Central banks will offer a reflationary response. The Fed will cease rate increases and rates in Europe will be cut or remain flat. With the slowdown in growth, reflationary policies would boost global excess liquidity and build steam for a recovery.

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