Offshore equity markets have recovered quickly since last Wednesday’s sell-off which was prompted by growing fears that US President Trump would be impeached. Markets aren’t concerned with the impeachment itself, but rather what would happen to the re-inflation policy if Trump wasn’t President anymore.
 
Over the weekend, more news stories have come out on Trump’s actions. The speed of the stories means that we are likely to hear more over the coming weeks.
 
The equity market seems to have priced in the political risk associated with Trump and we think the current equity rally is more to do with the pick-up in global growth, rather than the Trump re-inflation trade.
 
With global fund managers holding large levels of cash, the mantra of "buy on the dips" still holds.
 
The equity market rally, however, largely remains unloved despite strong earnings in the US, Europe and Japan. It seems that market participants are waiting for a catalyst to push the markets higher or lower. We don’t think they’ll get one. Rather, we are expecting a slow, quiet move to the upside which many investors may not notice until the end of the year.
 
Bond yields, however, have dropped to levels that are lower than when Trump was elected. This means the bond market may be pricing in more political risk than the equity market.
 
As for the Dollar, the US Dollar index is also at lower levels than when Trump was elected.
 
The fading political risk in Europe has strengthened the EURO against the US Dollar. We are also seeing a revival in the euro-zone and Japanese economies – both of which are now growing faster than the US. This is leading to speculation that the European Central Bank and Bank of Japan might reduce the pace of their asset purchases sooner than previously thought - and putting pressure on the US Dollar.
 
Emerging market equities have climbed by 20 per cent in the past six months, reaching their highest level in nearly two years. A key driver of the rally has been increased optimism about the prospects for corporate earnings, fuelled by a recent pick-up in global growth.
 
The pick-up in global growth should continue to support emerging market equities, albeit not at the same pace of growth we have seen over the last six months.