Rising Political Tensions – A Key Risk to Watch

As protests continued in the US for a second week, similar marches were also seen globally including in the UK, Spain, Australia, Germany, France and Japan. On Sunday, President Trump said that National Guard who were deployed to respond to the protests will be asked to withdraw from Washington D.C. Earlier in the week, Trump had mentioned he may deploy military troops on city streets.

Several cities have also lifted their curfews, including New York City, which had its curfew lifted on Sunday after 6 nights. There are also rising fears that COVID-19 infections may increase during the protests just as the country navigates out of COVID-19 shutdowns.

Implications on the global economy

The current high uncertainty environment as countries cope with the social and economic impact of COVID-19, leaves a large economic exposure to the rise in political uncertainty. Across countries, there are tendencies for poor economic conditions to be associated with a higher degree of dissatisfaction with the state of democracy, which may subsequently have disruptive consequences for economies.

Geopolitical tensions, mainly related to China, are also rising and Citi analysts think that anti-China rhetoric may worsen ahead of US elections in November this year. Risks to the Phase One trade deal has increased but the deal may be needed by both sides for economic and political reasons. The US may need additional economic positives amid widespread social unrest. Fiscal and monetary policy have the potential to lower economic uncertainty and while Citi analysts note that initiatives are moving in the right direction, more may be needed.

What does this mean for markets and portfolios?

Thus far, financial markets have been broadly unaffected. The S&P 500, Shanghai Composite and Hang Seng indices closed up 4.91%, 2.75% and 7.88% respectively for the week ending 5 June.

Nonetheless, negative headlines remain a key risk to be watched and occasional bouts of uncertainty and market volatility can be expected ahead.

Geopolitical / political disruptions are key risks that could challenge or impede economies and markets as they recover from the health crisis. As such, Citi analysts believe portfolio diversification and asset allocation remain paramount in managing potential volatility.