U.S. equity investors have had plenty to worry about in August with an escalating U.S.-Chinese trade spat and a brief inversion of a key dividend that helped send stocks to their worst performance in the first half of a month in 2019.
Dow Jones industrial average
DJIA, + 1.20%
is down 3.7% on a monthly basis, the S&P 500
SPX, + 1.44%
has fallen 3.1% and the Nasdaq Composite index
COMP, + 1.67%
has lost 3.4%.
But even as high-probability risks – such as the US-China trade conflict – capture investors' minds, there is a growing combination of lower-probability risks, so-called gray swan events, that individually or in combination can create even more heartburn for investors when the third quarter ends.
1. No-deal Brexit: The October 31 deadline for Britain to reach an agreement to leave the European Union in an orderly fashion is fast approaching and newly elected Prime Minister Boris Johnson has signaled his willingness to face the consequences of a non-negotiated Brexit , "come what may, do or die." A conservative legislature has even suggested that Johnson could unilaterally withdraw from the EU by August 24..
The UK Budget Responsibility Office estimated in July that a non-negotiated Brexit would bring the world's sixth largest economy into recession. The European economy, already shaken by the global slowdown in manufacturing, will also be adversely affected by new trade barriers and uncertainty that would rise from the UK leaving the EU.
2. Car rates: An even greater threat to the European and global economies could be a significant increase in U.S.-EU trade tensions. On May 17, the Trump administration announced it decided that US imports of cars and car parts represent a national security risk, setting the stage for tariffs of up to $ 128 billion in car tariffs from the EU and Japan, which would be the main objectives of new charges
Also see: Trump delays car tariffs for the EU, Japan for six months
3. EU-U.S. trade dispute: Apart from car tariffs, the threat of a wider European-American is. trade conflict woven. Europe was hit by 25% steel and 10% aluminum tariffs introduced in 2018, against which the EU retaliated against its own 25% steel tariff.
The latest development is the Trump administration's proposed imposition of duties on European aviation producer Airbus SE
EADSY, + 0.50%
, with Europe expected to retaliate in nature against Boeing Co.
BA, + 0.75%
. Although circumscribed so far, a recovery of trade tensions with the EU may be a much bigger deal than China given the degree of economic integration.
4. Hong Kong protests: Political turmoil has raged in Hong Kong for more than two months as a protest against an extradition deal with mainland China has metastasized to a broader democracy movement.
The conflict has contributed to a 14% drop in the benchmark Hang Seng index
HSI, + 0.94%
since May, as investors worry about Hong Kong's fate as a global financial center and whether a potential Beijing collapse could trigger further conflict with the West
5. Italian budget drama: While Italy has avoided sanctions from Brussels for failing to reduce its budget deficit to an acceptable level in 2019, Europe's third largest economy is moving towards a conflict with the European Commission in 2020, with its budget deficit expected to rise to 3.5% of GDP, well above the 3% limit set by EU rules.
6. Iran conflict: A series of quasi-military clashes between the US and Iran have been largely cut off by oil and stock markets this year, including allegations by the Iranian and US military that each of them had shot an opposing drone operating near the Strait of Hormuz – a 21- mile choking point for global oil supply bordering Iran and separating the Persian Gulf from the Arabian Sea.
These incidents were followed by seizures by British and Iranian tankers, and threats from Iran to shut down completely, which would interrupt the flow of a third of global oil shipments and threaten a wider military conflict that could affect the global economy and markets.
7. Currency War: A headwind for US equities this year has been the historically strong dollar, backed by relatively strong US economic growth and extraordinary monetary stimulus from the European Central Bank and the Bank of Japan.
Central bankers say the monetary stimulus is aimed at lowering interest rates in their home economies and not at devaluing currencies to boost exports, but President Trump has placed this reality at the forefront of his attack, blaming perceived trade rivals for using monetary stimulus to lower the values of their currencies.
The administration has recently labeled China as a currency manipulator while pushing the Federal Reserve to lower rates, in part to devalue the dollar. An escalation against currency wars can further lower investor and business confidence, which is already a significant headwind for global markets.
8. India-Pakistan conflict: The Kashmir region has been a point of (sometimes military) conflict between the two nuclear forces since the division of British India into independent states in 1947.
Tensions are rising again after Indian Prime Minister Narenda Modi's government revoked the special status of the Indian state of Jammu and Kashmir in early August, giving it autonomy and allowing it to enact laws to maintain its status as India's only Muslim-majority state.
The Indian government then tried to suppress protest by sending thousands of troops to the region; cutting internet, mobile phone and landline connections; and arresting Kashmiri politicians. Pakistan downgraded diplomatic relations with India and cut off bilateral trade, and Pakistan's Prime Minister said he expected violence to occur.
9. Argentina: The Argentine Stock Market
fell more than 37% Monday after its business-friendly President Mauricio Macri lost a primary election to center-left opponent Alberto Fernandez by a margin of 48% to 32%, fearing Macri will lose the October general election and Argentina will settle in its ways with free spending that has led to numerous defaults and inflation crises in decades past.
Barron's at MarketWatch: Argentina is facing a leadership crisis, and that's a problem for the country's markets
10. All the other trade spat: Other major economies have followed Trump's lead in using trade barriers as tools to force policy change abroad. South Korea and Japan have become entrenched in a trade war with roots in a decades-long conflict over atrocities committed by Japan during its colonization of South Korea in the first half of the 20th century.
U.S.A. and India, the world's fifth-largest economy, is also slipping closer to a trade war after India retaliated in June against US tariffs on steel and aluminum, raising its customs duty to $ 1.4 billion. Dollars for US imports. Trump responded with attacks on the Indian government, writes in a tweet that “India has long had a market day with tariffs on US products. No longer acceptable! "