Political risks provide “wall of worry” – Goldman

Investing.com – Recent macro data has reduced volatility in many asset markets, but political risks present a “wall of worry,” according to Goldman Sachs.

The U.S. May inflation news has further reduced the risk of a hawkish policy shock, while the payrolls report and services surveys have mitigated fears of a sharper slowdown, the influential investment bank said, in a note dated June 24. 

These benign developments have worked to keep equity and developed markets currency volatility anchored, with U.S. rates range-bound. But amidst this calm there have been sharp outbreaks of volatility in European assets and emerging markets carry trades, sparked by a series of unexpected election outcomes, renewed focus on fiscal and institutional erosion, and an unwind in concentrated positions. 

Those jitters have sharpened the focus on upcoming political events—the national elections in France and the U.K., and before that the first presidential debate in the U.S. 

“As political risk premium builds around those events, we may be setting up for one more shot at relief through the summer months before the U.S. election season gets properly underway,” said analysts Goldman Sachs.

“If the macro news stays friendly, as we expect, that should allow FX carry to gradually recoup its recent drawdown and equities to make fresh highs as they climb the ‘political wall of worry’. But recent events are a reminder that political risks may cause the most abrupt changes to the current backdrop,” Goldman said.