From US government shutdown to geopolitics: what should investors fear most?

The US government has run out of cash. This is the headline that has dominated global news on the weekend and threatens to inject volatility into the market as the stalemate between Republicans and Democrats drags on. But is this the biggest threat to ASX investors?

The short answer is no. There are a lot of other global issues that pose a bigger risk to our bull market which has sent the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) soaring over 20% in the past two years.

Experts agree that the partial shutdown of the US government after the warring parties and President Trump failed to reach a new agreement on the budget is unlikely to have much of an impact on markets as we’ve seen it all before under the previous Obama administration.

Back then, markets were roiled by the US government shutdown as the uncertainty weighed on sentiment. But those sell-offs proved to be a tidal wave in a Tea Party teacup.

But this isn’t to say that geopolitical risks have softened considerably since. If anything, the macro risks are probably more elevated than in the last four plus years.

Here are some global issues that would pose a greater threat (at least for the time being) to our most popular and well known blue-chips like the Big Four banks including Commonwealth Bank of Australia (ASX: CBA), blood products maker CSL Limited (ASX: CSL), mining giant BHP Billiton Limited (ASX: BHP), telco Telstra Corporation Ltd (ASX: TLS), supermarket chain Woolworths Group Ltd (ASX: WOW) and investment bank Macquarie Group Ltd (ASX: MQG).

  • Trade War: This tops my list of probably macro issues that could neuter our bull market. The US and China have been sparring on many fronts, including trade, and unpredictable President Trump appears to be itching to start a trade war with Australia’s most important export market. A trade war could very well drag the Australian economy into a recession.
  • War on the Korean Peninsula: This is still a relatively unlikely outcome, particularly as relations between both Koreas seem to be thawing. However, we are talking about two volatile leaders here who are armed with nuclear weapons (Kim Jong-un and Donald Trump – in case you missed that). Any outbreak of violence in that region will almost certainly suck Australia in.
  • Rising Global Interest Rates and a Bond Market Bear: Interest rate settings in many developed countries are expected to rise this year. This is generally bad news for equities but it is worse news for the bond market as higher rates mean lower bond prices. A tightening of monetary conditions will also reduce liquidity in the stock market and lower stock valuations.

These aren’t the only global threats to our market in 2018 but they are the ones we should be keeping a close eye on. The US government shut down isn’t high on my list at this stage but if the situation cannot be resolved within a week or so, this will quickly change.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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