|10 April, 2018

Are global equity bulls running out of steam?

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

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With trade war tensions gripping the headlines, it’s easy to lose track of the more mundane issues

The ongoing global trade drama between the United States and China has kept the markets on their toes. The U.S government has repeatedly played down fears of a trade war with China, but much of the current unease seems to stem from anticipation of how the world’s second-largest economy will react to President Trump’s ongoing provocation.

Investors were left with a sour taste in their mouths come early April after China imposed tariffs on 128 U.S. food imports worth $3 billion. Both the Dow and S&P took a hit as a short-lived sell off swept across the New York market. Trade war anxiety is certainly weighing heavily on risk sentiment, and one more doom-mongering headline could be enough to spark another market-shaking selloff. 

While U.S.-China tensions are gripping the headlines, it’s easy to lose track of the more mundane issues lingering in the background. Fears of rising interest rates and global inflation have bruised equity bulls in recent weeks and the bout may well continue for another round (or three or four) as the quarter progresses. In a high interest rate environment, investors are likely to be more attracted to bonds which are seen as safer than stocks. A rise in global inflation could also prompt a flight to zero-yielding gold.

While optimism over fiscal developments in the U.S. (such as tax cuts and increased infrastructure) may rekindle risk appetite and pep up the equity bulls, I’m expecting gains to be limited throughout Q2. The positive impact of tax cuts could be overshadowed by the negative effects of a global trade war, ultimately spelling trouble for stock markets.

Worries over tightening regulations in the tech sector put pressure on the Nasdaq at the close of Q1. With Mark Zuckerburg set to testify before Congress this week, Trump’s very public Amazon-bashing in full flow and Tesla struggling to meet its own production targets, we could see investors reevaluate the price they’ve been paying for tech shares.

And let’s not forget oil. Persistent oversupply concerns put the commodity in a prime position to punish the stock markets. Soaring production from U.S. shale continues to blight OPEC’s efforts to rebalance the market. A prolonged period with low oil prices also puts the profits of players like ExxonMobil, Shell and BP in jeopardy, ultimately dragging their share price lower and negatively impacting the whole market.

All the ingredients for severe losses across the stock markets seem to be in place - we’re just waiting for a catalyst to revitalise equity bears and punish their bullish counterparts in the process.

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