Considering the sheer volume of geopolitical war talk, it might seem surprising that stock markets ended the week up, not down. The reason for this is most likely that the probabilities for an actual trade war between the US and China are seen as reducing, while the probabilities of retaliatory US military strikes against Syria’s Assad regime (inadvertently) getting out of control are potentially underestimated.
A speech by China’s president Xi on his country’s plans for trade and economic rebalancing sounded so constructive and measured that investors became more inclined to believe that negotiations rather than tit for tat tariffs would be the further course of this trade dispute. Together with Trump’s conciliatory tweet. one could be forgiven to think it has all just been blustering and a storm in a teacup. The prospect of renewed hostilities involving the US in Syria seemingly unnerved market only briefly.
When Trump’s tweets were not followed by the intimated immediate rocket strikes, the assumption became that it had once again been more bluster and volatile tweeting, than an actual step up in retaliation measures compared to what has been experienced in the past. Indeed, the Trump administration’s actions have proven to be far more measured than the president’s language of tweets would have first suggested.
While we would like to agree with this interpretation, we know that capital markets are not particularly good at assessing political risks and therefore we will only breathe easier once the deed is done and the civilised world has delivered its message to the Assad regime that anybody resorting to chemical warfare will always pay a price that is higher than any possible tactical gain. In the meantime, we have to assume that things could inadvertently escalate, even if this is not our central case and expectation. More on this topic in our ‘US and Russia conflict over Syria’ article this week.
Beyond this noise, investors are beginning to come to terms with the post equity market correction environment. Having rapidly switched from Goldilocks and stock market ‘meltup’ joys at the beginning of the year, to panicking over inflation and economic overheating in February, to expecting global trade wars and economic slowdown in March, 2018 has already provided quite a few contrary perspectives of where we may go from here.
In this regard, it is increasingly apparent from the economic data flow that the acceleration in growth last year is giving way to a more moderate pace of activity. Whether this is called rolling-over, peaking, plateauing or dimming of growth, it most probably sounds more worrisome than it actually is. With the growth dynamics of last year it is little wonder that business sentiment in Europe and the US got ahead of itself. This is now reverting back to more realistic levels, which makes it look like a significant drop, when in actual fact the previous expectation highs may have been just as overblown.