Global markets in a delicate spot

17 April, 2018

Analysts at Westpac, suggest that global markets remain in a delicate spot due to ongoing uncertainty of the US/China trade saga and growing geopolitical tensions.

Key Quotes

“The global narrative has quickly shifted from synchronous global growth, upgraded growth and glimmers of inflation in early 2018 to a focus on tariffs and protectionist rhetoric. That said, markets have been in a more conciliatory mood with President Xi’s Bo’ao speech highlighting that China is willing to negotiate.”

“We ultimately believe that we will see a negotiated solution (even one that allows the US to claim an immediate political victory). That said, there is still a long way to go and further bouts of volatility and headline risk seem assured.”

“Geopolitics has also grown in importance in recent times, with recent US led airstrikes on Syria. While President Trump may have declared “Mission Accomplished”, this action has unsettled global equity markets and increased volatility.”

“With this uncertain backdrop, USD has not been able to capitalise and seems likely to remain stuck at lower levels for longer. The threat of a more hawkish Fed may be the USD’s best hope, yet that risk seems remote given the heightened market volatility, trade tensions and still benign wage/inflation trends.”

“Bond yields have been steady, but continue to have a bearish underpinning and US10 year yields continue to threaten the psychological 3% level. We still believe a material push higher in yields would require either growth data to surprise to the upside and/or renewed inflation fears. Two other key themes underpin bond markets:

1. The continued move higher in Libor and its potential repercussions. This is affecting AU and (to a lesser extent) NZ. The rise in BBSW is forcing higher rates on many corporates and adding to RBA caution. RBA FSR states “the recent spike does not relate to major market stress or concerns about bank credit risk.” Nevertheless the fact that such widening was last associated with the depths of the financial crisis (and true bank funding risks) is unsettling.

2. At the same time (and no doubt related) we saw the CBO publish revised forecasts US Fiscal Position. They show a dramatic deterioration in their latest forecasts - from 2019, the CBO’s best-case scenario sees the deficit at 5% of GDP, leaving public debt to GDP at 96% of GDP in 2028. That is a lot of US Bonds to issue at a time of rising interest rates and when Trump continues to antagonise their largest creditor.”

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