Investors heavily focused on inflation may be missing a “tail risk” on the geopolitical front, according to Frank Rybinski, head of macroeconomic strategy at Aegon Asset Management. “They are difficult to predict” and manifest “very quickly,” Rybinski said of such tail risks in a telephone interview Tuesday. He expressed concern that China and Russia may be testing Biden‘s new leadership in the White House, saying “there could be a simmering geopolitical tensions that risk boiling over.”
China is “becoming much more aggressive” towards Taiwan, conducting exercises that simulate a takeover of the country, Rybinski said. The Associated Press reported last week that the United States “provides the island with defensive weapons and is legally bound to treat threats as matters of ‘grave concern.’ Under President Joe Biden, US military ships and surveillance aircraft have significantly increased targeted activity in China, the AP report said, citing a spokesman for the Chinese Defense Ministry. The geopolitical tail risks worry Rybinski, as they can quickly turn into a drain on risky assets like stocks. As for Russia, he said he is monitoring the ways the country may be strengthening its relationship with China. Inflation-related fears appeared to weigh on markets on Tuesday as investors took in comments from US Treasury Secretary Janet Yellen that interest rates may have to go up “somewhat” to prevent the economy overheats. The high-tech Nasdaq Composite COMP was down 1.8% at the close on Tuesday, while the S&P 500 SPX was down -0.67% and the Dow Jones Industrial Average DJIA was down + 0. .06% achieved a profit of 0.06%. Read: Dow stacks 370-point reversal for modest gains as tech stocks plunge Weakness in US stocks on Tuesday fueled offerings in safe haven assets, including government bonds. Some investors also pointed to geopolitical tensions as a potential catalyst for the TMUBMUSD10Y 10-year Treasury yield, 1.593% slipped for the third consecutive session. US stocks face “a tough road to the upside,” as more investors worry that the Federal Reserve will have to start talking about reducing its asset purchases much earlier than the central bank has signaled, according to a note. Tuesday from Edward Moya, OANDA Senior Market Analyst for the Americas. Moya also cited international concerns. “Financial markets were already nervous and pushed to session lows after the United States asked the G7 to consider agreeing on a mechanism to counter Chinese economic power,” Moya said in the note. “The tensions between the world’s two largest economies have been on the back burner, but if this becomes a focal point, risk appetite may not have a chance any time soon.” While considering geopolitical risks, Rybinski remains bullish on stocks. “We actually like stocks,” he said. “We are overweight in stocks.” Aegon’s chief macroeconomic strategist pointed to a “very good tailwind” in the strong US economic recovery, with companies increasing their profits while also having “all this excess capacity from the recession.” Rybinski said he believes the shares could rally higher next year thanks to the company’s strong earnings. Meanwhile, geopolitical tensions are “something to watch out for” as it is an area investors have not talked about as much in the markets, according to Rybinski. “They are still focused on the history of inflation,” he said.