Escalating trade strife has heightened fears that economic conditions have worsened, with signs that businesses are curbing spending and financial market sentiment surveys weakening. As central banks—including the U.S. Federal Reserve and the European Central Bank—take more-dovish stances, issuers in many regions stand to benefit from declining benchmark borrowing costs. While we see little chance of recession in the world’s biggest economies in the next 12 months, the prospects for GDP growth have dimmed somewhat, given the direct—and, more importantly, secondary—effects of trade tensions.

Escalating trade tensions have heightened fears that economic conditions in the U.S. have worsened, with signs that businesses are curbing spending and sentiment surveys suggesting investors are moving toward more defensive asset allocations. While most indicators of financing conditions remain largely supportive, deteriorating economic data and heightened global political tensions has led to concerns that credit conditions will become more difficult.

Optimism is fading despite the Federal Reserve's more dovish tone and the possibility for lower interest rates in the U.S. later this year. Political challenges have been materializing in Latin America's largest countries, and new administrations are facing waning domestic investor confidence as policy uncertainty prevails. Financing conditions, however, have improved compared with the first few months of the year, and highly rated corporations have taken advantage to issue debt with favorable terms. Overall, we expect volatility to continue, driven by trade tensions and domestic policy uncertainty; these conditions will weigh on economic growth expectations.

Heightened near-term (mainly geopolitical) risks are feeding uncertainty and weighing on economic fundamentals notwithstanding the Fed’s and ECB's easing bias. Overall, the outlook for ratings has a more negative tilt after its recent gradual decline.

Financial markets have welcomed the proactive policy response of the Fed and ECB to counter the risk of an accelerating trade-induced slowdown in the global economy. How long this persists in the face of heightened uncertainty and growing nearterm risks remains an open question.

Uncertainty has returned to Asia-Pacific's credit conditions. The year started optimistically on the back of the Federal Reserve’s reversal of its tightening stance and Chinese authorities' willingness to loosen credit supply (albeit carefully) to avoid a rapid economic deceleration. However, the recent increases of tariffs by first the U.S. and then China has shaken investors’ confidence.

Credit conditions remain supportive for banks globally going into third-quarter 2019, even if the trade battle between the U.S. and China as well as geopolitical tensions are undermining confidence and economic momentum across the globe. It has prompted the U.S. Federal Reserve and the European Central Bank to recently take a more dovish stance, leading to financing conditions that remain broadly supportive for banks worldwide. That said, "low for longer" interest rates and increasing competition from nonbank players, including fintechs, are putting more pressure on bank profitability and business models.