Geopolitics Overtake Inflation As Investors’ Key ‘Tail Risk’: BofA Survey

  • Geopolitical turmoil is a top concern for markets, a Bank of America survey shows.
  • Worries about inflation have dropped as prices cool and the Fed nears the end of rate hikes. 
  • Despite worsening geopolitical sentiment, markets have yet to reflect the uneasiness.

Higher inflation is no longer the leading concern for investors surveyed by Bank of America, and worsening geopolitical conflict now sits in the top spot. 

In September, 40% of participants in a survey from the bank indicated that inflation-induced monetary tightness was the key tail risk facing markets. That number has since dropped to 25% in this month’s iteration of the Global Fund Manager survey.  

This comes as the Federal Reserve has already paused further interest rate hikes in two consecutive policy meetings, while Tuesday’s consumer price index report for October showed no sign that inflation was at risk of a resurgence. 

Not only are markets now indicating that the central bank is unlikely to keep raising rates, some projections estimate that interest will come down sharply next year.  

At the far end of rate-cut expectations, UBS predicts the Fed to slash rates by 275 basis points in 2024 in response to a slowdown in the economy. Though not every institution shares this outlook, the possibility of so-called hard landing recession scenario has become the third biggest tail risk among surveyed investors.

Meanwhile, in the past two months, the share of investors who view geopolitics as the leading risk has jumped from 14% to 31%. Geopolitical fallout has only expanded since then, with the Israel-Hamas conflict taking center stage. 

Warnings from key Wall Street commentators have also risen in that timeframe. Billionaire investor Ray Dalio has raised alarms of a growing conflict between the US and China, while JPMorgan chief Jamie Dimon cautioned about the possibility of the worst crisis since World War II.

Investors don’t appear to be flocking haven assets that would usually benefit from significant turmoil. For instance, after Hamas’ October attack on Israel, the Treasury market’s ongoing sell off continued as concerns about higher rates and growing US deficits overshadowed the implications of a new conflict in the Middle East. 

Risk premiums in other safe havens, such as gold, are also starting to crack, a recent JPMorgan note highlighted:

“From a peak of around $175/oz at the end of October, gold’s geopolitical risk premium on top of what can be explained by underlying moves in the USD and US 10-year real yields has more than halved and sits around $65/oz,” it said.

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