• Market moves reflect losing faith in the reflation story
• Will a more interventionist US foreign policy impact markets
• Geopolitical risk is resulting in increased safe haven buying 

Anthony Rayner, manager of Miton’s multi-asset fund range comments:

“Economic momentum has been so strong that it has overshadowed other risks for the best part of a year. However, there is some evidence that economic momentum is now slowing, while geopolitical risk has started to dominate the headlines.

“Since the beginning of March, moves in equity markets, government bond markets and the US dollar have all been broadly consistent with markets losing faith in the reflation story.

“This is likely due to a number of factors: the hard data has had some weak points (though soft, i.e. survey, data remains broadly strong) and, after an unconvincing build up to repeal Obamacare, followed by a failure to repeal, markets have become less optimistic about Trump’s ability to press ahead with his growth-positive policies, such as tax reform.

“Historically, a gap between the hard and the soft data is not unusual, with the soft data tending to overshoot on the positive and the negative side. That said, the size of the current gap is unusual and will have to close at some point.

“Our observation would be that the soft data has been universally strong, and it’s pretty unusual for soft data not to be, at least partly reflected in the hard data, but the extent to which this is the case is unclear. Either way, the forthcoming earnings season will be more of a reality check than normal from a top-down perspective.

“Turning to US foreign policy, in the last few days the US has attacked a Syrian air base with cruise missiles and diverted an aircraft carrier towards North Korea. This US military response is inconsistent with the isolationist “America first” rhetoric that defined Trump’s campaign. However, in recent months there have been a number of other data points which are consistent with a more conventional US foreign policy, including the friendly dialogue with China and Europe, and the musical chairs within the foreign policy team, suggesting a less radical approach than had been originally indicated.

“Most likely an element of the actions by both Syria and North Korea was to test the response by the new US government, but they are also testing the resolve of their ‘backers’, Russia and China, respectively.

“All of a sudden, the US is more closely involved in two long term crises and, in the case of North Korea, there is genuine concern as to the combination of leadership sanity and access to powerful long range missiles.

“In short, the concept of “G zero” (an emerging vacuum of power in international politics) has been challenged and the global policeman looks like he’s back on the beat. It is far too early to draw too many conclusions: is Trump’s policy change best characterised as volatile or pragmatic? Will the latest moves add to uncertainty or actually lead to more stability? Will Trump realise he can achieve much more overseas than at home, and therefore be increasingly activist? Will Iran move on to the radar soon?

“The recent market reaction to heightened geopolitical risk has seen some safe haven buying, for example, gold, US Treasuries and the Japanese yen. Both of these recent developments are pushing markets in similar directions, away from risk assets. For us, we are awaiting more data points but remain pragmatic and ready to act.”