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a Fed rate hike. A less obvious one is something that
would normally be a non-event for global markets: U.S.
presidential elections. I’ll begin with the less obvious
one.
Donald Trump is currently the front runner to become
the Republican Party’s nominee.
This scenario worries not only many Americans but
also various world leaders. It’s true that (at the time
of writing) polls show that Trump would probably lose
against either Clinton or Bernie Sanders. But we can’t
rule out a Trump victory. Markets could have a strong
negative reaction.
Great Britain will hold an election to see whether they
remain or exit the European Union. This process will
almost certainly create market volatility as voting day,
June 23, approaches. So far, the chances of a Brexit
are low. Nonetheless, I project that the U.S. dollar will
approach historic peaks against most world currencies
late in June.
Finally, we have the risk of further terrorist attacks like
the ones suffered by Brussels this month and Paris last
November. Even though ISIS is apparently being beaten
by the international coalition currently fighting it in Syria
and Iraq, it can still react violently in financial hubs such
as New York, London, or even Hong Kong, triggering a
bout of severe market volatility.
A China-triggered crisis remains a risk, of course, but
a low-probability one, in my view. While the Chinese
national debt has ballooned in recent years and its asset
bubbles there persist, the most recent economic news
out of China give hope that the worst is over for China
for 2016.
I know this is sounding pessimistic. But remember
what I said about resilience. Also, note that the USA
has everything it needs to keep its expansion going a
bit further, though the way to get there will certainly be
rocky.
My base-case scenario is in fact benign. In it, although
volatility again erupts in financial markets, the “Brexit”
threat comes and goes, Trump does not become
president of the USA, and China grows at least as fast as
its target pace of 6.5%.
This has been a piece in which I warn readers that,
although the quarter one is ending on a calm note
after all, we can’t let our guard down: complicated and
volatile times lie ahead. At the same time, I remind you
that we have global resilience on our side.
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