Variable income: the four risks that have already been discounted in prices
1. Core inflation
The price level has been reducing from the highs it reached in 2022, although it is still above the 2% target set by central banks.
In the US, the Consumer Price Index (CPI) is also proving stickier than expected, especially after rising in March to 3.5% year-on-year, while the underlying variable repeated at 3.8%. %.
“It is true that general inflation is at more manageable levels for central banks, but the base effect will disappear and concerns the evolution of the underlying. If the cooling of the economic and credit cycle persists, price growth will continue to decline,” the firm stressed.
2. Overreaction of central banks
“That the central banks begin to lower rates from the second half of 2024 is an element that the markets have already begun to discount, but an overacting in their decisions, maintenance of their monetary policy, especially in the eurozone, could become in it short term in one of the most notable risks for the markets“, they point out in Diaphanum.
Therefore, strategists believe that, if the slowdown in Europe is greater than expected and US consumption loses dynamism, business profits will sufferwhile in China “more stimuli will be necessary to avoid failing to meet its growth objectives”, taking into account that geopolitical uncertainty will persist and that, in the long term, “high debt reduces the possibility of greater growth.”
3. Geopolitical risks
Ukraine, the Middle East and Taiwan are the three sources of geopolitical tension that the market does not take its eyes off and that, without a doubt, will determine its behavior in the coming months.
“The solution to the conflicts in the Middle East and Ukraine, which today does not seem like a very feasible scenario in the short term, would reduce the premium on risk assets, but even in that case, the distortions that have generated “, they add in the entity.
In the case of Taiwan, the outbreak of a war involving China and the United States would cause a high impact on the global economy, far above the war in Ukraine and other shocks that have occurred in recent years, “although At the moment it is very unlikely,” they noted in Diaphanum.
4. Unexpected result in the US elections
2024 is already known as the electoral ‘super year’, where almost half of the population will go to the polls. But of all the elections there is one that will be key for the markets and the world economy: the US presidential elections.
Nowadays, The polls do not clarify whether the current president Joe Biden is the one with the best chances of repeating his mandate or if it is Donald Trump who can recover the White House, which generates a some uncertainty which is usually reflected in the increase in volatility and doubts about the economic policy of the new Administration.
“As the elections approach, if the panorama becomes clearer about the favorite to achieve victory and then a surprising result occurs, doubts could arise in the markets, also taking into account the influence on monetary policy, which historically tends to remain neutral in the months prior to an election, but this time it faces a scenario that is complicated to manage due to the current market situation,” these experts stated.
Four risks to take into account
1. More pronounced economic slowdown
For this exercise, The market is betting on a slight drop in economic activitygiven the decrease in savings, the increase in delinquencies and the lower creation of jobs in an environment of high interest rates.
Diaphanum, for its part, predicts that economies with a greater weight in the industrial sector will show greater weakness, while emerging countries will widen their growth differential compared to advanced countries, led by emerging Asia.
In this context, any negative event can induce the economy into a recession, especially in Europe, “with businesspeople and consumers who are not optimistic, and with a credit cycle that continues to weaken due to the effects of monetary policy and divergence between countries, the most affected being those with the greatest weight in the industrial sector,” they add. .
2. Resurgence of the trade war
Geopolitics will continue to play a leading role, due to the possible extension of war conflicts and a trade war with China that will not disappear, “with the addition of the latent conflict with Taiwan, which will continue to be a focus of concern,” they emphasized in Diaphanum.
The relationship between both countries is increasingly tense, so the risk of trade conflict persists and “could worsen if any unexpected event occurs, already causing global economic uncertainty and a rapid ‘relocation’ of companies seeking to protect themselves from the consequences.” of a conflict between the two superpowers,” according to these experts.
3. Energy price
He conflict in the Middle East It is in a moment of full effervescence and it only increases uncertainty, which will have an impact on energy. In fact, a barrel of Brent oil, a benchmark in Europe, reached above $90 after the recent attack on Iran by Israel, although it subsequently relaxed.
“The central stage is of a louder noise than true impactalso taking into account that the market has buffers and the producing countries have the capacity to expand their stock, but an escalation of tension could blow up that initial scenario,” the firm states.
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4. Excess debt
A short-term problem, but above all one that can be in the long term, is the strong debt that exists worldwide.
This has two main implications for Diaphanum: since the level of debt is so high, it cannot be raised at the speed it has been doing, “which leads to removing possibilities of stimuli, both public and private.”
On the other hand, if there is an increase in financing costs, “States would see how a significant part of their budgets would be allocated to debt service, and companies would also see their results diminished by financial costs,” they concluded.
Source: Ambito
