Rising political risks fuel financial market anxieties

Subject

Global reflation trade falters as markets question Trump

Significance

US President Donald Trump warned in a newspaper interview on April 12 that the dollar was getting too strong and said that he would prefer the Federal Reserve to keep interest rates low. His remarks were the latest challenge to the speculative bets that have underpinned surging stock markets since last November's US election. Since mid-March, the benchmark 10-year Treasury yield has fallen by 40 basis points and the dollar has weakened as confidence in Trump’s pro-business policies wanes and inflationary pressures soften across the world.

Impacts

• Investors face greater near-term volatility in sterling assets as the June 8 UK election adds new uncertainty to the Brexit process.
• The recent volatility in oil prices will continue due to mounting uncertainty about the impact of production cuts by major producers.
• Euro-dollar volatility will heighten further if Marine Le Pen and Jean-Luc Melenchon both reach the second round of France's election.