Jamie Lee Curtis is back on the big screen, but relatively more bloody mayhem has occurred in equity markets this month. The mask is on and risk is off. We thought for some time that volatility in most financial markets was preternaturally low, but like going to see one of those movies with eyes wide open, it is stomach churning nonetheless to witness the anticipated event. Equity markets sold off most days this month, and forward-looking measures of price volatility reverted to near their February highs.
US economic data provided no obvious trigger for the selloff. Indicators mostly point to activity clocking in above trend, and data surprises moved back into positive territory. Businesses report that their spending intentions remain in expansion mode, but this has not shown up in capital spending, which has been soft.
No progress was made in settling the trade dispute with China, consistent with our view that the relationship will get worse before it gets better and creating a headwind for business investment. In that regard, trade and tariffs got multiple mentions on quarterly corporate earnings calls. There is also circumstantial evidence Chinese officials are struggling to find sufficient domestic levers to pull to offset the external drag from trade. We think they will succeed because of ample precedent, but this may be closer run, adding to fundamental risk. The European economy retains its ability to disappoint, with data on the cool side of expectations and the discussion of Italian fiscal policy heated.