BAML survey: Trade war top tail risk
While fund managers have turned bullish on US equities (SPY), there is still no dearth of concerns. In the BAML (Bank of America Merrill Lynch) survey, 31% of respondents see a trade war as the biggest tail risk for the markets, up from 25% in May. The developments during the one-month period have again put the trade war risk at number one in June from its number two position in May.
You might recall that the Trump administration did not extend the steel and aluminum tariff exemption deadlines for European nations and Canada, which did not set very well with those allies. The latest G7 summit and escalating tensions again reminded the markets how real the trade war risk currently is.
Hawkish policies by central banks
Another 26% of survey respondents cited the risk of a hawkish policy mistake by the Federal Reserve or the European Central Bank (or ECB) as the second-biggest tail risk. The Fed and the ECB are both meeting this week to decide the future path of their respective monetary policies.
Fund managers are worried that the Fed might tighten the policy too much, which could lead to a depreciation of the US dollar (UUP) and eventually force a yield curve (BND) inversion, leading to an economic slowdown. The ECB, on the other hand, could tighten sooner than required, which could derail economic progress in the region.
The third biggest tail risk identified by the BAML survey respondents was the risk of an emerging or euro-debt crisis. As rates rise, respondents were concerned about corporate leverage, with 42% of them believing that corporations are overleveraged. That could mean downside risks for equities (DIA) compared to government bonds. The average cash holdings also remained higher at 4.8%, which is above their ten-year average of 4.5%.
While these are still concerns and haven’t blown into something that could derail economic growth, the increase in any of these concerns or the materialization of any of them over the next few months could be a bullish driver for gold prices (GLD). Gold thrives as uncertainty and risks mount in the markets.