Trade war is still investors’ top concern
In the BAML (Bank of America Merrill Lynch) December 2018 survey, trade war concerns were again named as the top concern among global fund managers. The trade war was cited as the top risk for a seventh consecutive month. About 37% of fund managers surveyed cited it as their top tail risk, which is higher than last month’s 35%.
While both the US and China (MCHI) have agreed on a trade war truce for 90 days starting December 1, markets are still uncertain of the outcome.
Quantitative tightening and a China slowdown were the distant second and third biggest concerns, cited by 18% and 16% of investors, respectively.
Investors are talking about a policy mistake by central banks, especially the Fed. Many market participants expect the economy to weaken in 2019. They’re concerned that due to the lag between policy change and its visible impact on the economy (SPY) (DIA), the Fed might keep tightening the rates even after the slowdown has already taken over. The markets are eagerly awaiting the Fed’s decision, which is meeting on December 18–19, and more so the outlook for rate hikes in 2019. The availability of easy money has been one of the major factors behind the rising US equity markets (IVV). The end of easy money could put the brakes on the economy. You can read Why a Fed Policy Mistake Is Worrying Markets for more on this topic.
The next biggest fear among fund managers was the China (FXI) slowdown, cited by 16% of survey respondents. As the trade war escalates, concerns over China’s slowdown are also picking up. A slowdown in China could have a spillover effect on the world’s economies. China’s domestic demand is on a downtrend, which is evident from the latest batch of Chinese trade data. The data showed weaker-than-expected exports and imports for November. Every new data point adds to concerns of weakening growth. The slowdown is also evident in other indicators including its recent factory activity. China’s official purchasing managers’ index for November fell to 50.0 from 50.2 in October. The 50-level mark differentiates expansion from contraction.
You can read Why China Needs More Than a Trade War Truce to Buck the Slowdown for more on this topic.