Global Market Watch: What Could Derail the Rally? In a Word, Politics

Global financial markets have stretched this year’s risk-on rally into the fall. By now, most markets – equity or fixed income – look expensive based on historic valuations. However, it is hard to imagine a sustained correction as long as central banks continue to print money. The Federal Reserve may have started the process of balance sheet reduction. Yet both the European Central Bank (ECB) and the Bank of Japan will continue their asset purchase programs through all of next year – and in the case of Japan, well beyond. Further market support comes from improving global macroeconomic fundamentals.

That was underscored by the International Monetary Fund’s (IMF’s) bullish October “World Economic Outlook,” which upgraded the fund’s global growth forecasts for the second time this year. With monetary policy and global macro fundamentals pushing markets higher, politics remain the main risk. At the start of the year, we highlighted the list of potentially disruptive 2017 elections. So far, none has had a sustained market impact. Yet a number of political events could still result in major policy changes in the next nine to 18 months and affect market performance.

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