Trade war top tail risk
While fund managers are bullish on US equities (SPY), there’s still no lack of concern in the market. In the BAML (Bank of America Merrill Lynch) August 2018 survey, for the fourth month in the last six, trade war concerns were cited as the top concern among global fund managers.
A total of 57% of the fund managers surveyed cited trade war risk as what they considered to be the top tail risk. In July, 60% of respondents saw a trade war as the biggest tail risk for the markets.
Recent trade escalations between the United States and China (MCHI) have led more fund managers to see trade tensions as a risk. The risk of a trade war is the biggest investor fear since the EU (HEDJ) debt crisis in 2012.
The next biggest fear among fund managers was quantitative tightening, which was cited by 15% of participants. Central banks around the world, including the Federal Reserve, embarked on quantitative easing following the financial crisis of 2008. For the past couple of years, the Fed has been tightening its policy. Market participants worry that this reversal of direction could derail economic expansion and negatively affect the markets. Since yields between two-year securities (SHY) and ten-year securities (IEF) (TLT) have narrowed, market participants are growing concerned about an inverted yield curve, which is usually seen as a precursor to an economic recession.
The risk of a slowdown in China came in third place, with 14% of participants worrying about it. As the trade war is escalating, concerns over China’s slowdown are also picking up the pace. Its fixed-asset investment expanded at its slowest pace from January to July.