Potential Hardships Exist for Global Markets

Investors beware. There are potential risks ahead on the global market, according to Bloomberg.

First, inflation may linger. Wage growth and supply-side pressures including high energy costs may keep consumer prices elevated, canceling out the pivot to cuts from the Federal Reserve and European Central Bank that markets expect to see in the middle of 2023.

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“The bond market is expecting inflation will pretty neatly come back into zone in 12 months,” Matthew McLennan, co-head of the Global Value Team at First Eagle Investment Management, told Bloomberg. But that’s not a guarantee.

Second, if China can’t manage the fall-out from loosening severe COVID-19 restrictions — such as an overwhelmed healthcare system — economic activity in the country and beyond could collapse.

“China’s infection curve will rise and will only peak one or two months after Chinese New Year,” said Marcella Chow, Global Market Strategist for JPMorgan Chase. She expects the nation to succeed in reopening but still cautions there may be “risk in terms of how COVID evolves.”

Third, Russia’s invasion of Ukraine continues to present unknown risks. “If the war worsened and if NATO became more directly involved in hostilities and sanctions ratcheted up, it would be quite negative,” said John Vail, Chief Global Market Strategist for Nikko Asset Management. Secondary sanctions against major Russian trading partners like India and China would worsen the effect of current restrictions, he said, creating a “major supply shock for the world in terms of food, energy, and other items like fertilizer, certain metals, and chemicals.”

Fourth, emerging markets could struggle if inflation isn’t effectively subdued. A high or rising U.S. dollar would work against emerging economies since many have dollar denominated debt, according to Bloomberg.

Finally, if COVID returns in the form of a more deadly strain, supply chains could snag once again, slowing economic activity and inciting inflation. “We believe the macro hit to growth would be most felt by larger economies and those more dependent on trade,” said JPMorgan’s Chow.

Chow said she believes, however, that the virus will continue to recede and that any negativity in the markets would be due to investors’ pricing in recession in the U.S. and Europe.