In May we saw geopolitical risks continue to loom large and add to the volatility in global equity markets. Specifically, in the Eurozone. Italy is having difficulties forming a government and the rise of populist anti-euro parties are gaining momentum. This is causing concerns that Italy may leave the Euro and is adding more uncertainty to European markets.
Other geopolitical risks that remain present are the situations in Iran – where President Trump pulled out of the nuclear deal – and in North Korea, where potential peace talks may or may not happen in Singapore this June, with one meeting already being cancelled.
As he’s been promising for months, President Trump announced additional tariffs of $50 billion on Chinese products. His government also announced they would be imposing tariffs on steel and aluminum produced in Canada, Mexico, and the E.U, ultimately citing national security concerns as the reason behind the decision. All parties have announced that they will take retaliatory measures.
At this point in time investors are used to the sound of trade wars, which so far has been more of a war of words. To date corporate earnings – which typically drive equity markets in the long-term – have felt little pressure by this risk.
Largely due to these geopolitical concerns, the CBOE volatility index (VIX) has surged by the most since March this month. This recent surge in volatility may increase the attractiveness of lower risk securities.
Source: Yahoo Finance
We expect more volatility to continue, driven by geopolitical risks and rising yields in debt markets.
Global economic growth remains relatively strong. This is clear when examining recent corporate earnings reports and reviewing labour market data, particularly in the U.S where job openings in April were at a record high, unemployment fell to a mere 3.9%, and layoffs are still down to their lowest level ever. Strength in the labour markets often drives consumerism, which ultimately drives economies forward.
Our views are that geopolitical risks create short-term volatility in capital markets, but rarely impact them over the long-run, especially when the fundamentals remain intact. Therefore, our global outlook remains unchanged: we expect a low-growth environment and sustained volatility to continue.
During this period where there’s plenty of noise present in the markets, our advice is to stick to your strategic asset allocation and use your pre-authorized contributions to take advantage of dollar cost averaging, keeping your eyes on your long-term financial goals.
On a lighter note, the 2018 World Cup in Russia is approaching in June. The event is so massive that it might even catch the eye of traders, as suggested by this data that proves market volatility showed signs of decline during the past four out of five World Cups. We’ll have to wait and see if this trend presents itself in this year’s World Cup tournament. Hopefully your team wins!