Critical Threats To 2017's Bull Market – Part 2: Over-hyped Risks?
With The Donald J. Industrial Average surpassing new record highs every day, questioning this bull market’s continued existence remains heresy outside of dark little corners of the internet.
However, continuing his series, Bloomberg’s macro strategist Mark Cudmore dares to mention a few of the more prescient ‘known unknowns’ that could hamper the meltup for the rest of the year… and in the case of today, some that may not.
Overhyped market risks provide just as many trading opportunities as genuine ones. It’s crucial to delineate what matters and when.
Today’s column argues that other oft-cited concerns can be safely ignored for the moment.
Nafta is prominent in the news and any move by President Donald Trump to abandon talks and exit the deal would have global repercussions. Still, that worst-case scenario won’t be a 2017 issue. Even if Trump jumps, he has to give six months notice and Congress will fight to keep the U.S. in.
Will China increase its deleveraging focus after the Communist Party Congress? Probably, and that may hit domestic financial assets. But officials will not want to significantly hurt the real economy and have an impressive track record of slowing growth without killing it. That reduces the risk of a spillover into world markets.
Global yields breaking higher would have major consequences. With only two months of data to go before year-end, are investors suddenly going to believe in runaway inflation though? Given the skepticism shown by the flattening U.S. curve, a one-off print will be insufficient. There’ll need to be a significant change in the trend and there’s simply not enough time left for that in 2017.
Brexit? With expectations so depressed and in the context of a two-year process, it’s not a major near-term risk. It’s a U.K.-asset story, with minimal contagion elsewhere.
Tax reform failure? It seems unfeasible for this to be resolved either way in 2017 and expectations — at least in the market — for a successful passage aren’t high in any case.
A Kurdistan-prompted oil shock? The region just doesn’t provide enough supply to be a game-changer — not with U.S. shale producers ready to ramp up production whenever prices rise.
A failure to form a German majority coalition? Like Brexit, it’s a regional story. A negative that may be underpriced in local assets but not something global investors will panic about.
So, says Cudmore, excluding a Black Swan event, only North Korea, Catalonia or a U.S. government shutdown have the ability to cause a 10%+ correction in the MSCI All-Country World Index by Dec. 31… and here’s why…