The tepid signs that global growth was bottoming are likely to be overwhelmed by the negative shocks from rising trade tensions. Moreover, the cushion from valuations/risk premia is quite low. The UBS Synthetic Trade War Monitor helps us track where trade sensitive assets sit within the trade talks ‘fear – complacency’ spectrum. Whilst optimism on trade talks has understandably fallen recently, our monitor still sits in the upper half of its post-February 2018 range and very far from its most pessimistic levels in late-2018. As pessimism increases, European and EM equities are likely to exhibit the most downside pressure over the medium-term and even US equities in the near-term.
If US-China tensions persist, US 10y yields may well fall through their 2016 low of 1.35%. Nonetheless, the bond yields are approaching a point from where they’d offer very little cushion to risk assets to absorb incremental bad news – growth or geopolitics. We’ve found that, historically, the US money markets have been the most reliable barometer of recession risk. If even more cuts were priced in the very front end of the curve a month after the first cut, the market (correctly) smelt a recession coming in the subsequent 12-18 months. Very worryingly, exactly that change is under way today.
I agree with that.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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