On Sunday evening, we brought you some telling charts from the latest installment of Barclays’ Global Macro Survey which found respondents bullish on equities despite acknowledging how stretched global stocks have become.
Generally speaking, the 700 institutional clients who participated in the survey think the “Goldilocks” environment of synchronous global growth and subdued DM inflation will continue to provide a tailwind for risk assets for “a bit longer.”
Of course no one knows what “a bit longer” means. All anyone knows is that they need to hang around in these trades “a bit longer” than the next guy or else risk foregone carry and underperformance in a world where every basis point counts.
But the survey wasn’t all rainbows and sunshine. One risk flagged by respondents was a downside macro surprise in China. Have a look at the evolution of these responses:
One rather obvious question there is this (as articulated by Barclays): “If China is a systemically important economy, how can this deeply negative sentiment be reconciled with a favorable view of the global economy in general?”
The answer, apparently, is that although the risk of a downside surprise in the East is high, it will not be “big trouble in little China” – only “little” trouble. To wit:
Investors think the magnitude of a downside surprise will be small. Most expect very narrow moves in the renminbi over the next three months. Furthermore, they do not think a collapse in China is imminent — other risks are more worrisome.
Yes, “other risks are more worrisome.” What risks are those? Why, geopolitics of course. And do note the accompanying bar chart which is very interesting. What it shows is that when geopolitics is identified as the predominate risk factor for markets, the average level of the VIX is typically lower than when other types of risk are perceived to be more pressing:
But perhaps the most important point in the entire presentation is the following:
Clients now think inflation is a bigger risk to price stability than deflation. Over the past few years, the pendulum of risk to price stability has swung back and forth between inflation and deflation. Over the past quarter and in line with the rising inflation expectations evident in bond markets, investors have given inflation more prominence as a risk. Seventy-one percent of our clients now think inflation is a bigger risk than deflation.
Why is that so important, you ask? Simple: because the one thing that could force central banks to withdraw transparency and revoke the market’s license to co-author the policy script (read: remove the central bank “put”) is a sudden upturn in inflation that catches policymakers behind the curve.
Any questions?
