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The sharp fall in global equities on Thursday is, at one level, a necessary correction in valuations. Fear had almost disappeared from trading floors. Volatility indices—a measure of that fear—have dropped to their lowest level since the euphoric bubble years before the 2008 financial crisis. It is, at another level, a sobering reminder that one of the biggest risks to the global economy comes from the unpredictability of US politics.
Much of the global market rally was based on the hope that Donald Trump would reflate the largest economy in the world through tax cuts, business regulation reforms and fiscal expansion. There are now fears that this agenda may remain undone because of the looming constitutional crisis in the US—which may even lead to an impeachment hearing. The resultant uncertainty has rattled confidence in the financial markets.
The unpredictability of US President Donald Trump has not been appreciated enough by investors. Political risks are now higher in the US and Europe than they are in the major developing countries. The tables have been turned.