Risks to risk appetite in the next few weeks - Westpac

Richard Franulovich, Research Analyst at Westpac, suggests that their best guess is that in the not too distant future the bullish narrative for risky assets, characterised by strengthening data and pro-growth monetary and fiscal policy signals, will shift to one that is more two-way for risky assets.

Key Quotes 

“The complexion of the global data continues to firm. As noted earlier this week Westpac’s global data surprise index is at four year highs, remarkably and with little fanfare. The US has been leading the way, stronger June PMIs and payrolls notable examples. Solid June US retail sales extend that theme for another week. Meanwhile, China is getting in on the act too, her June round of data mostly beating expectations. Our global data surprise index will remain elevated for yet another week.

That is unequivocally good news for risk appetite. There are of course many instances in recent history when stronger data has led to a repricing of Fed tightening expectations, upending risky assets. Stronger data more often than not coincides with improving risk appetite and vice versa. But, there are some risks on the horizon.

• A “Trump bump”. The Republican national convention is next week. Markets have not priced in any “Trump risk” whatsoever but tighter polls could change that. With the US Presidential election less than four months away markets are if anything comparatively more complacent. Tighter polls, starting with a likely convention bounce for nominee Trump next week could change that.
• Markedly diminished Fed tightening expectations have been an important background positive for risk appetite, lower yields pushing markets further out the risk spectrum in search of yield. Moreover, stronger than expected manufacturing and services PMIs, a strong June payrolls report and a solid June retail sales report will encourage officials that growth momentum in Q2 is solid.
• The BoJ meets late July and expectations are running high as talk of “helicopter money” does the rounds. That, and hopes of a meaningful fiscal stimulus after Abe’s sweeping upper house election win have also been a key catalyst for stronger risk appetite. The bar for over delivering on expectations would appear to be rising.
• More immediately, the ECB July 21 seems less likely to provide a fresh boost to risk appetite too.

Any one of these aforementioned risks - if realised - could easily upset risk appetite. Combined, they would impart a serious jolt. Our best guess is that in the not too distant future the bullish narrative for risky assets, characterised by strengthening data and pro-growth monetary and fiscal policy signals, will shift to one that is more two-way for risky assets.”