Market Extra: While investors focus on inflation concerns, a less talked about ‘tail risk’ has this strategist’s attention


Investors highly focused on inflation may be missing a “tail risk” on the geopolitical front, according to Aegon Asset Management’s chief macro strategist Frank Rybinski.

“They are hard to predict” and manifest “very quickly,” Rybinski said of such tail risks in a phone interview Tuesday. He expressed concern that China and Russia may be testing the new Biden leadership in the White House, saying “there could be a simmering of geopolitical tensions that do risk boiling.”

China is “getting much more aggressive” with Taiwan, performing exercises that simulate a takeover of the country, said Rybinski. The Associated Press reported last week that the U.S. “provides the island with defensive weapons and is legally bound to treat threats to it as matters of ‘grave concern.’” Under President Joe Biden, U.S. military ships and surveillance planes have significantly increased activity directed at China, the AP report said, citing a spokesperson for the Chinese Defense Ministry.

Geopolitical tail risks worry Rybinski as they can quickly turn into a flight from risk assets like equities. As for Russia, he said he’s monitoring ways the country may be tightening its relationship with China.

Inflation-related fears appeared to weigh on markets Tuesday, as investors digested comments from U.S. Treasury Secretary Janet Yellen that interest rates may have to “somewhat” rise to keep the economy from overheating. The technology-heavy Nasdaq Composite

fell 1.9% in Tuesday’s close, while the S&P 500

declined 0.7% and the Dow Jones Industrial Average

eked out a gain of 0.1%.

Read: Dow stages 370-point reversal to eke out modest gains as tech shares dive

Weakness in U.S. equities on Tuesday fueled bidding in haven assets, including government bonds. Some investors also pointed to geopolitical tensions as a potential catalyst for the 10-year Treasury yield’s

slid for a third session in a row.

U.S. stocks face “a difficult path higher” as more investors worry the Federal Reserve will have to start talking about tapering its asset purchases a lot sooner than the central bank has signaled, according to a note Tuesday from Edward Moya, OANDA’s senior market analyst for the Americas.

Moya also cited international concerns.

“Financial markets were already on edge and pushed to session lows after the U.S. asked the G7 to consider agreeing on a mechanism to counter Chinese economic might,” Moya said in the note. “Tensions between the world’s two largest economies have been on the back burner, but if this becomes a focal point, risk appetite might not stand a chance in the short-term.”

While eyeing geopolitical risks, Rybinski remains bullish on stocks.

“We actually like equities,”  he said. “We’re overweight equities.”

The Aegon chief macro strategist pointed to a “very good tailwind” in the strong U.S. economic recovery, with companies increasing earnings at the same time that they have “all this excess capacity coming out of the downturn.” Rybinski said he thinks stocks could push higher into next year on the back of strong company earnings. 

Meanwhile, geopolitical tensions are “something you have to watch” as it’s an area that investors haven’t talked about as much in markets, according to Rybinski. “They are still focused on the inflation story,” he said.

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