At the outset of this year, some of the most scrupulously followed minds in finance appeared to have come to an understanding on what the immediate outlook was going to look like. After years of false starts, economic growth was ultimately on a continuous and upward path across the world. The consensus was that after approximately a decade of expecting the point had finally arrived: interest rates were, at last, going to rise in the US, and indeed finally in Europe. With many billionaires, business leaders and politicians peppering their judgments with allusions to “synchronized” global growth.
Halfway through 2018, markets have not behaved as many expected. The latest shock to this unity came last week as the Sino-US trade protectionism stand-off pushed China’s main stock indices into bear market territory, and hit European and US equities.
Investors also had to get their heads around sharp falls in the renminbi, invoking recollections of the sell-offs in the Chinese currency in August 2015 and January 2016 which brought about two of the biggest periods of market turmoil in recent years. The question many investors are now asking is whether the market narratives that investors were so assured of at the start of 2018 have only paused or whether concern over the intensifying trade tensions means all existing bets have to be reexamined. As it stands, plenty of twists have rattled the assumed investment narrative so far this year. Equities, rather than surging higher in a “blow off”, have suffered sharp bouts of volatility.
Market confidence in Europe, which was meant to underpin a sustained recovery from the financial crisis a decade ago, has been shaken by recent events in Italy. Interest rate expectations in the US have indeed risen but the yield on the 10-year Treasury note is lower than its peak in January and has failed to continue its jump above 3 per cent in May. And investments in EM equities have so far proven painful for anyone who opted for the sector at the start of the year, with the iShares MSCI Emerging Markets (NYSE:EEM) equity index down by 9 per cent year-to-date.