Macroscope | Christmas ups and downs on Wall Street: goodbye to the era of cheap money, hello to volatility?
- Nicholas Spiro says US political risk is driving markets to such a degree that hopeful news about the Chinese economy failed to set off a rally. The danger is that the selling pressure might start to undermine confidence in the US economy
Remember the “America first” trade? That was the much-trumpeted investment strategy in the first nine months of this year which involved betting heavily on the outperformance of American financial assets. In equity markets, the trade worked wonders, with the benchmark S&P 500 index gaining more than 9.5 per cent, while the MSCI All Country World ex USA index, a gauge of global stocks outside the United States, lost nearly 3.5 per cent.
Yet, since early October, America first has come to symbolise an entirely different phenomenon: the return of dramatic volatility, which has contributed to the broadest losses across asset classes since the 1970s, according to data from Morgan Stanley.
The potentially dire consequences of these developments for asset prices are eclipsing all other market-moving events and are now the main determinant of sentiment. Not only is the independence of the world’s most important central bank under threat but the effectiveness and credibility of the US government’s response to a financial crisis is being called into question at a critical time for markets.