Multi-Asset

Investment Insights by our experts and thought leaders

Global equities corrected downwards by 7.5% in USD terms in October. Stocks in the US ended the month down 6.5% after an intra-month peak-to-trough drawdown exceeding -10%.

The trade war between the US and China appears to be morphing into deeper and more protracted conflict as reflected in a recent speech by US Vice President Mike Pence, who criticised China not just for trade practices but more fundamentally for its broad political and economic model.

A trade deal was finally struck between the US and Canada that combined with the Mexico deal has been rebranded as "USMCA", though it could aptly be described as the same old NAFTA with a few tweaks.

As markets continue to grapple with the potential for a protracted trade war between China and the US, central banks have stuck to their task of setting monetary policy.

Equity pessimism took a breather in July as investors shifted focus from trade wars to the start of this quarter’s highly anticipated earnings season. With 53% of the companies in the S&P 500 reporting, over 80% had positive earnings-per-share surprises and almost 80% reported a positive sales surprise.

Trump imposed USD50 billion in tariffs against China with USD200 billion still pending and more in the pipeline to effectively cover all imports (USD450 billion) from China.

Financial markets continue to come to terms with a more protectionist and less globalised world. The surprise perhaps is not that tariffs have finally been imposed by the US on its trading partners, but that it took so long for a key campaign promise to become reality in spite of Republican control of the House, the Senate and the White House since November 2016.

Uncertainty surrounding Trump policy has reached new highs with global trade wars back on. Steel and aluminium tariff exemptions have been allowed to lapse for Canada, Mexico and Europe, and USD 50 billion in new technology-focused tariffs against China will be detailed by mid-June and imposed shortly thereafter.

After depreciating for over 18 months, the US dollar has managed to make a comeback, recouping its 5% YTD loss in a matter of weeks. Coupled with 10 year US Treasury (UST) yields hovering around 3%, this has put pressure on Emerging Markets (EM).

As much as we would prefer to discuss market fundamentals over the trials and tribulations of the current US Administration, it has been largely unavoidable in this first quarter of 2018.

The market narrative changed abruptly over the quarter, from observing the “melt up” in January with exceptionally low volatility, to a massive spike in volatility in early February with markets remaining on edge ever since.

Markets continue to come to terms with the return of higher volatility, triggered ostensibly by fears of inflation and the unwinding of highly leveraged short volatility positions at the beginning of last month.

In our 2018 outlook, we made the case for rising volatility as central banks across the developed world slowly remove the stimulus punch bowl, but few would have imagined volatility spiking with such a vengeance as it did in recent weeks.

Over the past few years, one of the main risks that concerned our team was the possibility that asset classes could become positively correlated.

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