In this month's viewpoint we consider whether we have seen the end of the "Trump trade", if investors have become too complacent and where the danger points are for emerging markets.
Page 3: Mid-year markets review
- The "Trump reflation trade" appears to be over as doubts over the president's ability to deliver on promises made have grown. The initial sell-off in long-dated government bonds has now almost fully been reversed. Meanwhile, oil prices are back in bear market territory, despite OPEC's decision to keep its production quotas in place.
- In reviewing the performance of markets so far this year, we find that equities have been the best performing asset class, with the Spanish IBEX 35 index leading the way. Gold and corporate bonds have also done well, but commodities were the worst performers.
Page 8: Are investors complacent?
- Rising equity markets and low volatility raise the question as to whether investors are becoming complacent, especially against a backdrop of falling bond yields and elevated political uncertainty. We look at the macro factors driving risk through the lens of the VIX index.
- A sharp drop in oil prices, or greater than expected Federal Reserve (Fed) tightening threaten the risk rally. The latter is the greater threat, but will probably not materialise until later in 2018. Meanwhile, investors may find it hard to resist being "complacent" as liquidity will continue to drive markets with the risk being that they move into bubble territory.
Page 12: Global liquidity and EM: where are the danger points?
- With the Fed signalling tighter policy, the European Central Bank (ECB) tapering and China tightening, global liquidity conditions are getting less easy than they used to be. Emerging markets have benefited from an extremely accommodative environment, and we look at where the vulnerabilities may lie.
Page 16: Views at a glance
- A short summary of our main macro views and where we see the risks to the world economy.