SINGAPORE (May 19): The correction in global equities we warned of last week appears to have started. Don’t panic though. We don’t expect a meltdown. More like a “drip, drip, drip” kind of slow melt – a necessary correction for technically overbought markets. And while it will be driven by political dynamics in the United States, the correction will likely be across all developed markets. Asia ex-Japan and Emerging Markets, as we had noted early this week, offered better value. Hence, they could be more resilient. But it is difficult to see them sustaining upwards in the face of a broad DM correction.

US politics may be a convenient trigger and driver. But the bigger and simpler story is that equities are richly valued, lack new drivers, and carry the burden of some pretty big expectations. And a lot of those expectations have to do with the ability of Donald Trump to justify yet higher valuations – through tax cuts, fiscal stimulus, faster economic growth, and yet higher earnings. But the Trump has been piling up the markets’ doubts over his ability to deliver more than a new controversy every month. Or should that be a new one every day? And there are also policy uncertainties with regards to quantitative easing. The Japanese will probably continue into the foreseeable future. But the limits are discernible in the Euro Area. Meanwhile, the US faces the risk of a Big Shrink in the Federal Reserve’s balance sheet.

We said earlier this month that the huge divergence between rising Global Economic Policy Uncertainty Index and depressed equity volatility index could not sustain. Something had to give. Well, equity volatility spiked 40% Wednesday.

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