SINGAPORE (Aug 22): As markets shook off recent shocks, investors pushed valuations up so much that equities and bonds seemed to be priced to perfection, leaving little room for error.

Furthermore, in light of current and deeply troubling global events, investors now perceive the world to be a dangerous place, and have moved funds to asset classes that seem safer than others.

What can change these perceptions?

Here are our best guesses in four key areas of risk.

US growth revives and Fed tightens faster than expected:
Data shows that the American economy is shaking off the lethargy that hit it in the first half of this year. We believe that the US economy could well continue to provide gentle upside surprises, which will cause the Fed to raise rates at least twice this year.

The deflationary scare:
We would argue that there is more good deflation than bad deflation now. Overall, deflation in all traded goods (primary as well as industrial goods) is easing, as shown in global trade data.

China’s impact on the rest of the world:
The most recent developments in China suggest that the risks will be to the downside. Consequently, the rest of the world will see prices of cyclical commodities consumed by China to continue to weaken. Exporters of capital goods to China will see further falls in demand. In addition, policy action has to be ramped up. That could mean further depreciation of the renminbi.

Political risks:
With the possibility of more terrorist attacks erupting, the risks of a Donald Trump victory, and the worst impact from Brexit just beginning to unfold, the list of political risks in developed countries is long and sufficient to have caused investors a lot of grief. Here, the direction of surprise is more difficult to predict.

For our full views on what these areas of risk pose to the US economy and beyond, read “What are the macro surprises that could drive financial markets?” in this week’s copy of The Edge Singapore (Issue 742, Aug 22), available at major bookstores, 7-11 stores, and selected petrol stations.