Saudi crisis, trade war, rising interest rates – there are plenty of fault lines in global markets but no catastrophe … yet

Hannah Anderson says there is plenty of sour economic news to go around, but for the time being, disruptions – mainly in the form of disputes over trade, currency manipulation and geopolitics – look temporary

PUBLISHED : Friday, 19 October, 2018, 10:57am
UPDATED : Friday, 19 October, 2018, 10:46pm

Ever since I moved to Hong Kong, any headline related to Asia in the local news prompts my parents to reach out. For them, Asia really only makes the headlines in the event of extreme weather or a natural disaster – earthquakes, in particular, receive a lot of coverage.

Any tremor, no matter how small or how far away from Hong Kong, warrants a call. Given the US Geological Survey has recorded more than 10,700 earthquakes so far this year, the vast majority in the Pacific Rim, I have received a lot of calls. I appreciate my parents’ concern, but every call goes the same way as I try to convince them that whatever shock was just reported is, in fact, just a tremor.

This recurring conversation has been on my mind this week since it closely resembles the concerns about markets recently dipping. Episodes of market volatility, just like seismic events in the Pacific Rim, are normal. Tectonic plates shift to relieve stress along fault lines and sometimes this adjustment creates a genuine natural disaster.

More often than not, though, these shifts are short-lived and do not do much damage – 87 per cent of the recorded earthquakes this year were less than a 5 on the Richter scale (a low-level earthquake). The same is true for sell-offs.

As we move further into a late cycle, volatility tends to rise. Several factors could be to blame for the next market tremor.

How Trump’s trade war is driving China nuts

Despite progress in the United Statestrade dispute with several major economies – Canada, Mexico, the European Union, Japan – tensions, and thus market attention, remain high between the US and China. I just wrapped up a few days of meetings with trade negotiators from both sides in Washington and came away more convinced than ever that it will be a protracted dispute. As we have seen this year, this dispute remains a significant sentiment risk to markets, and a threat to corporate earnings over the medium term.

Raising the stakes in trade disputes is the US Treasury report on currency manipulation. No country in Asia is named a manipulator in this edition, but China, South Korea, India and Japan will remain on a watch list. The resulting rising tension is likely to harden US trade negotiators’ positions.

The US deficit reached its highest level in six years this week. On its own, this development is not of immediate concern, but rising interest costs may constrain the Federal Reserve’s policy in the long run. A surprise in interest rates has the potential to shake up sentiment.

US Fed does right thing by raising rates

The rising tensions between several countries and Saudi Arabia over the disappearance of a journalist could disrupt oil markets. This diplomatic crisis comes just ahead of the US-set deadline of November 4 for other countries to halt purchases of Iranian oil. The US was hoping Saudi Arabia would pick up some of the production slack to stabilise markets.

New data out of China this week signals investors can expect more slowdown in the coming months. New bank loans and total credit data show a moderately easier lending stance, but this increase is unlikely to offset some of the other pressures the economy faces, such as from softer property activity.

Costs of a US-China break-up are too high for either to bear

None of these events, on their own, are likely to be the source of a persistent shock, but could exacerbate stresses on existing fault lines in markets.

In the moment, it is often difficult to tell whether the volatility is just a temporary tremor or a portent of a greater shock to come.

A day or two of sell-offs is perfectly normal – the S&P 500 experienced an average of 30 pullbacks of 1 per cent or more between 1980 and 2017. Last week’s activity brings this year’s count to 18 so far. In all likelihood, the tremors are temporary, but it‘s always good to check in.

Hannah Anderson is a global market strategist at J.P. Morgan Asset Management