Politics, inflation and trade: three of the main threats to the multi-year risk asset rally have surfaced over the past month, prompting a resurgence in equity market volatility from record low levels.
But in a week dominated by news of escalating trade tensions, there have also been positive signs on each of these risks.
- Geopolitical risk appears to be easing. President Donald Trump has agreed to meet Kim Jong Un, the first ever meeting between the US and North Korean leaders, with the aim “to achieve permanent denuclearization. ” Some may see Trump’s move as legitimizing North Korea’s regime, but it represents a lessening of tensions.
- The severity of protectionism isn’t as bad as first feared. Trump signed orders for steel and aluminum tariffs yesterday, but granted exemptions to Mexico and Canada. EU retaliation so far has been limited to politically sensitive, but economically insignificant goods.
- Central banks remain on a gradual path. The European Central Bank removed its pledge to increase QE if needed, but President Mario Draghi stressed that the bank’s reaction function had not changed, and it would act for as long as required. Bank of Japan Governor Haruhiko Kuroda said on Friday that “even if our price goal is met during fiscal 2019, that doesn't mean we will immediately exit ultra-easy policy. ” The Federal Reserve remains data dependent, but has stated policy would not be swayed by individual data points.
Overall, risks have risen, particularly on trade, and we are monitoring developments closely. But we currently don’t believe the threats warrant a change to our risk-on stance, and we remain overweight global equities.