'˜Back to school' amidst hurricanes, earthquakes and nuclear threats

11 September 2017

As the summer of 2017 is drawing to an end, we are relieved that much of what could have gone wrong over the summer, did not. As reported over the past weeks, the global economic recovery and stabilisation has made consistent progress, with particularly the Eurozone coming up strongly and taking over the western growth leadership baton from the US.

The same cannot be said about capital markets - and politics. Investment returns have, despite stronger economic data and corporate profit growth, only very slightly moved beyond the healthy levels they had already achieved at the end of May. This '˜market breather' was what we had anticipated and on the back of the strengthening macro-economic outlook, we would normally look optimistically to the remaining 4 months of 2017.

That is, if it was not for politics - and now also mother nature. In purely economic terms the latter is more of a nuisance than a problem. Natural disasters create data fuzziness, as they first slow down activity levels in the affected regions, before rebuilding supercharges them further down the line.

Politics and geopolitics in particular are less predictable. Trump and European elections were the big worry points at the beginning of the year. Of those only Trump remains as a political instability factor, but given how very little he has been able to achieve thus far and how much public support he has lost in the process his fear potential regarding the outbreak of global trade wars has greatly reduced.

Unfortunately, the same cannot be said about the level of geopolitical tensions and here Donald Trump remains an uncertainty accelerator. North Korea leader Kim Jong-Un's ambitions to be recognised and respected as a nuclear arms power have begun to cast a shadow on the short to medium term global outlook.

While the US public is captivated and regionally disrupted by a particularly strong hurricane season, global security circles are nervously waiting what form of military provocation North Korea's leader may choose to mark the founding day of his nation (Sat 9 Sep).

A surprising rally in bond markets tells us that the more cautious part of the capital markets is beginning to take the threat of a thermo-nuclear conflict serious. It is positive to observe that China's leadership is all but amused and has started military exercises and missile interception drills along its border with North Korea. Less positive is to have a temperamental hot head as the top of the world's leading military power. We suspect that he won't be let near any buttons without supervision, but ultimately, we have to assume a far more trigger-happy US military than was the case under Obama.

At the time of writing on Friday, I am therefore having slightly mixed feelings as I look forward to the weekend. I will be very relieved if nothing has happened over the weekend or even better, if a Chinese/US/Russian alliance has successfully intercepted any '˜fireworks' from North Korea and vows to deal more effectively with the Kim Jong-Un situation.

As this is slightly wishful thinking, I am afraid that until the North Korea threat is dealt with, the outlook until the end of the year has become much more uncertain than the flow of positive economic data recently suggested.

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