The start of autumn marked a change in market dynamics. Volatility is up across the board, the US 10-year yield is flirting with its highest level over the last seven years following a rapid rise; equity markets are under pressure. After a period of highly divergent forecasts, markets are starting to price in a synchronised slowdown in global growth, and, hence, the fact that the peak in earnings acceleration is progressively shifting to being behind us. Some ongoing dislocations are accompanying this new situation. Cumulative hikes in interest rates in the US, while limited in absolute terms, have been sufficient to trigger the early stages of a risk-off positioning in emerging markets which have recently been negatively affected by idiosyncratic stories (Turkey, Argentina) with weak fundamentals. The risk-off sentiment has been further exacerbated by the Italian budget situation, while the most recent risk-off moves have also broadened their effects to the US in the tech area, which is very stretched in terms of valuations.

Implications related to trade disputes are also a feature of this new narrative. Protectionism is a lose/lose game: no economy will be exempted from paying its bill in the end. So far, the deterioration has been more visible in a deceleration of global trade growth and in economies with limited fiscal support, primarily in the Eurozone and China. Regarding the latter, policy actions (both fiscal and monetary) are too recent to have affected GDP growth figures. The potential impact on the US has so far been hidden behind the fiscal policy boost, but we may start to see the unintended effects of protectionism as we enter the Q3 earnings season. Possible downward earnings revisions due to tariffs, coupled with some wage pressure, could be a dangerous cocktail in a late cycle phase. If protectionism becomes structural and goes beyond being an electoral trick, it could become a risk. In our view, the impact will be more on the growth outlook and should lead central banks to lean to the accommodative side.

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