Trade wars. Global central bank monetary policy. Italian budget negotiations.

In no particular order of relevance nor ranked by the potential impact they could have to single-handedly derail markets, these three factors are currently at the forefront of capital markets.

The Italian budgetary concerns have ‘only’ been worrying investors for two months. The current team of Italian policy makers has until October 16 to convince its watchdog, the EU, to come up with a credible plan to bring the Italian economy back on its feet, without breaking the bank.

The EU was, in fact, not impressed by the draft budget plan, writing to Italy’s populist government to warn it of serious concerns that the country draft budget plan would breach eurozone spending rules. There have not been many developments over recent trading sessions, but heading towards the October 16 budget day, we expect the market to become edgier and tensions to intensify between the EU and Italy’s current administration.

The trade wars which the US has embarked upon with the world’s largest economies/blocks, such as China, Russia and the EU, are a relatively new phenomena for markets in recent history, say the past 10-15 years, though the tête-à-têteand toing and froing of words between the Trump administration and a number of the world’s most prominent leaders/politicians is well into its ninth month.

We all know, however, what a lasting impact it has had, primarily on market sentiment across the board, on asset prices. From the EU to EM, to weaker currencies to a great deal of uncertainty: many expected 2018 to be a challenging year but most were caught off guard by the trade wars, as they and the lasting impact they had on the markets were definitely not on the cards.

Then we have global central bank monetary policy. Markets’ main focus lies on the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Central Bank of China, but one must not overlook the impacts that monetary policy set by the Brazilian or Turkish central banks have on market sentiment and direction. Over the weekend, China's central bank announced a steep cut in the level of cash that banks must hold as reserves, in its attempt to lower financing costs and spur growth, amid concerns over the economic drag emanating from an escalating trade dispute with the US.

In all fairness, central bank monetary policy is ever present, now even more so when we are seemingly at the end of global ultra-accommodative stances as measures such as quantitative easing are being phased out as the economies appear to be showing a glimmer of robust growth. In fact, benchmark yields have risen markedly as a result, with the US 10-year trading above the 3.20 per cent level.

Trade wars. Global central bank monetary policy. Italian budget negotiations. In no particular order. But when combined with an already fragile market, we expect volatility to persist, credit to remain under pressure, and risk aversion to rise in a ubiquitous manner. For those who can stomach the volatility and put more money in, hang in there and do so cautiously. We do not see any imminent cause for concern although valuations could well come under pressure in the short term.

Disclaimer:

This article was issued by Mark Vella, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.