It’s fair to say that most market participants are relatively apprehensive about what the future holds. Wherever you look, there seems to be bad news waiting, and it appears that investors are looking for any excuse to sell equities and move to cash.
Still, markets have stabilised during the quiet weeks of summer and it seems, for now at least, investors are adopting the wait-and-see approach when it comes to portfolio management.
But there are plenty of risks on the horizon for both the global and US economies. While it is almost impossible to pinpoint which risks and events will spark the next market sell-off, Bank of America’s Global FX Strategy analysts in a report titled “21 Charts That Keep The Bulls Up At Night” have highlighted several key risks that the world economy and financial markets face during the next few months.
BoA: The world economy faces three downside risks
The main risks Bank of America’s analysts believe the global economy faces are pretty clear cut. They include; the risk that markets are too dependent on the Federal Reserve; the risk that oil prices may resume their downward drop and; there is a new wave of global trade protectionism inspired by protectionist politicians.
On the flip side, Bank of America’s FX analyst Kamal Sharma remains optimistic. Sharma points out that as well as of these negative risk factors there is also a positive risk factor facing the global economy in the form of massive fiscal stimulus. So far, countries appear to be reluctant to adopt this strategy but as monetary policy loses its effectiveness opinion could be swayed.
Here are Bank of America’s viewpoints on the key topics:
On markets’ dependence on the Fed:
“Sometimes we feel that the Fed has gained “too much credibility” for its own good, while its communication is often confusing and even inconsistent. At the same time, markets look at the Fed instead of the data, while the Fed seems to focus more on the markets than the outlook. This could lead to bubbles that burst, as the reality check with the data is eventually inevitable.”
On oil prices:
“Markets have looked past oil after its recovery from the high 20s early this year. This feels like a risk because of the widespread expectation of oil price recovery (including by ourselves)–after 18 months of falling capex and declining supply…the nonlinear negative market reaction to low oil prices early this year justifies concerns if oil prices fall much further. While low oil prices tend to be good for the USD, in this case it could be particularly powerful, as it could push other central banks into deflation fighting easing–as in early 2015”
On trade protectionism:
“Global trade has been on a declining trend. Both candidates in the US elections have been using unusually-for-the-US rhetoric against free trade. Even if in practice they turn out to be less protectionist than their campaigns would suggest, the US could shift away from its free trade policies of the recent decades. Both US and global growth would suffer as a result.”
On a positive fiscal stimulus surprise:
“Governments make a concerted effort to stimulate their economies via fiscal policy and drive up investment spending, helping rebalance global growth. A G20-coordinated effort would be the most effective, as it was the case after the global crisis. The reliance on unconventional monetary policies would wane and investors could be more willing to take risks. It could make the job of all major central banks much easier…but coordinated fiscal stimulus at a global scale is unlikely in our view and has been used only in extreme cases in the past.”
Below are some more charts via ZeroHedge