The 2 biggest risks in markets have a single source

Trump

REUTERS/Shannon Stapleton

LONDON — The two biggest tail risks listed by fund managers have a single source: US President-elect Donald Trump.

A recent survey by Bank of America found that 29% of money managers thought an international trade war was the biggest tail risk in January, while 24% cited a "US policy error" as the most worrying scenario.

Neither of these risks was cited by any fund managers in December.

A financial crisis in China, caused by either a currency devaluation or a popping property bubble, came in third place with 15%.

Here's how the chart looks:

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REUTERS/Shannon StapletonTail risks are events that are considered to have a low chance of happening but would have a big impact if they did come to pass.

The bank surveyed 215 fund managers last week with $547 billion in assets under management.

Fund managers are concerned about a trade war between the US and China, the two biggest economies in the world, because nationalist rhetoric instigated by Trump is beginning to turn into real policy. Last week China increased antidumping tariffs on US imports on grains used for animal feed to as much as 53.7% from 33.8%. The country also hiked antisubsidy penalties to as much as 12% from 10%, according to a Reuters report.

Tensions are rising between China and the US following remarks from the incoming Trump administration on trade, Taiwan, and the South China Sea, and the spat could quickly escalate and hit other American exports.

Deutsche Bank warned in a separate note sent to clients this week: "The other potential retaliation targets by China include: aircraft industry, seeds and fruits, pulp, wood products, leather products, and cotton.

"Is this step by China a prelude to a full-fledged US-China trade war? We still view large-scale US-China trade war as a risk scenario. Nonetheless, there are indications that the chance of such risk materializing is on the rise."

The Bank of America survey also highlighted the effect of the Brexit on the UK currency, with long US dollar and short British pound positions popular among managers. That means fund managers expect the dollar to rise in value and the pound to fall further.

Here's the chart:

BAML2

REUTERS/Shannon Stapleton

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