Global financial markets are testing resilience and risk appetite as sentiment is strained by stormy macro-economic headwinds made of global growth fears, warning signals of recession in the United States and geopolitical risks.
The MSCI World Index shows global equities climbed up from a valley in the first quarter, battling gamely up the cliff’s edge to reach levels last seen in January 2018. Investor risk appetite is braving significant odds. Financial markets have become extremely sensitive and highly reactive to headlines over global growth. A closer look beneath the headlines reveals the small print, some of which is supportive of equity bulls. The IMF forecasts global growth will continue to expand, albeit at the slower pace of 3.5 percent in 2019 and 3.6 percent in 2020.
Momentum in the world’s largest economies is more at risk, however, as demonstrated by the first inversion of U.S. Treasuries since 2007 amid ongoing trade disturbances between China and the US. An inverted U.S. bond yield is seen as a flashing amber light signaling the stronger possibility of a recession in the world’s largest economy. Elsewhere, Europe’s economic growth is deteriorating, with the OECD predicting just one percent growth in 2019 and 1.2 percent in 2020 due to local trade uncertainties over Brexit. On top of that, global trade dilemmas are an external threat for the EU’s growth prospects. China faces its own headwinds which have a knock-on impact on the sales performances of major European multinational companies, and the United Kingdom’s growth remains tepid as Brexit’s unresolved future spreads confusion.
All things considered, the markets have adapted remarkably well but the macroeconomic picture looks gloomy, with uncertainty feeding into volatility and impacting on stock markets, currencies and emerging markets. Looking ahead, geopolitical risk factors appear set to drag on sentiment in the second quarter. Although global equity markets have performed relatively well year-to-date, the Brexit drama, U.S.-China trade talks and growth fears are likely to weigh on investors, keeping them on edge and curbing bullish sentiment.
The markets are searching for the next major catalyst to determine a definitive direction either up or down. In my opinion, the downside could be in the form of confirmation that global growth is slowing or the U.K. crashing out of the EU without an exit plan to clear the way for organised trade relations between the blocs.
The upside could come in the form of a breakthrough in trade talks or surges in emerging market economies. In spite of the challenges and barring any black swan events, it must be said that global markets continue to maintain their resilience and weather the economic storms.
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