Some analysts, however, doubt that a significant downturn is looming.
“We are lacking a real driver at the moment for a meaningful correction,” said Eric Robertsen, head of global macro strategy and foreign exchange research at Standard Chartered. “Big U.S. fiscal package — believe it when I see it, U.S. inflation surge — no, a surge in the U.S. dollar – possible but not our base case.”
Another potential market upset was eliminated when Trump decided to tap Fed Governor Jerome Powell to run the Federal Reserve instead of Stanford economist John Taylor, Robertsen said. Taylor is regarded as a proponent of raising rates at a faster pace, and so the Powell pick was widely seen as a positive for stocks.
Nevertheless, cautious investors are reducing exposure to riskier equities while raising holdings of cash and safe-haven U.S. treasuries as the year draws to a close. But they’re not quite making a dash into cash as long as economy activity and corporate earnings remain robust.
“It looks to me like global equities are doing just fine. The S&P is fully valued but earnings momentum is good,” Robertsen said. “We have shifted our exposure from pure yield plays to growth plays as we think the growth story is still compelling.”
Global markets may be able to shrug off the impact of higher U.S. interest rates in the short term, but perhaps not over a longer time horizon. Emerging markets, in particular, may be susceptible to capital flight if higher rates mean investors flock back to U.S. assets. Local currencies could come under pressure, making U.S. dollar-denominated debt harder to service and possibly raising default risk.
“If you look at Fed monetary policy and the history of Fed policy, pretty much every major Fed tightening cycle you’ve had some sort of crisis in emerging markets,” said Callum Henderson, managing director for global markets Asia Pacific at consulting firm Eurasia Group. “Over the longer term you could well call Fed’s tightening boiling the frog.”
The “frog,” for its part, may be more resilient than ever before.
“Asia is much better placed than it was compared to the taper tantrum. Macro and political stability has improved. The overall picture in Asia is better,” BlackRock’s Seth said.
