Looking at headlines from the first half of 2019, global markets have seemingly been driven purely by trade relations, in particular those between the US and China. After talks broke down, the New Year started with constructive signals from both sides. Accordingly, risk assets turned in one of the strongest first quarters ever.

In some cases, such as with the oil price, the upswings were 50 per cent from the rock bottom reached in January to the highs of April. A trade deal seemed to be in the making, but the music stopped when Beijing sought revisions and the US pushed for a strong, enforceable deal. A blame game ensued and markets retrenched markedly in May.

Taking oil again as an example, the setback was a sizeable 20% or more in less than four weeks. After that, in the run-up to the G20 meeting in June, the situation calmed and risk assets recovered yet again.

Although the world is not as simple as the trade-tension narrative suggests, the single most important short-term driver of stock market activity has not been fundamentals but rather investors’ perception of them.

According to Benjamin Graham, one of the founding fathers of stock market analysis, “in the short run, the market is a voting machine, but in the long run it is a weighing machine”. In other words, in the short run you need to anticipate what other investors think, whereas in the long run you need to anticipate the fundamentals.

He was spot on. Knowing this and knowing how short lived investors’ memories can be, the question is: what will really shape the end of this decade within financial markets?

Weighing the bigger trends, we see the shift in monetary regime, the challenge of new technologies and political gridlock as more telling than the roaring daily headlines. To understand the financial world in the current investment climate, one has to acknowledge that there have been deeper tensions in the system and that these are likely to stay.

Government decision-making has been hampered by political stalemate in many countries, most prominently in the US, where the Republican President faces a divided Congress. This leaves little room for manoeuvre in the classic policy framework. However, trade policy is one of the few arenas in which the US President can put pressure on an otherwise blocked domestic system.

The situation across the Atlantic is not much different, given that a resolution to Brexit is not yet visible and the policy mix for Europe is far from clear. The struggle for technological supremacy is far-reaching and cannot simply be resolved by a trade deal.

Finally, monetary tightening has been the biggest stumbling block for financial markets over the past few months, with risks to sentiment and growth increasing against the backdrop of a Federal Reserve firmly entrenched on a monetary-tightening path.

Since the fourth quarter of 2018, trade tensions have been more of a headline risk, but most hopes are currently based upon a more benign monetary policy mix. Asian and European central banks have signalled their willingness for this and in June US monetary authorities followed suit. This should ease some of the fears that have haunted markets over the past months.

The recent escalation of the trade conflict, combined with a slowing in the macro data, makes a cut in the US policy rate more likely. Any correction in financial markets as a consequence of the trade conflict would significantly tighten financial market conditions. The markets expect the Fed to address this risk and deliver an interest-rate cut at the end of July as insurance against a potential financial market correction.

Monetary easing over the summer may be good enough to spur some relief in risk assets – until sentiment overshoots, of course. In the meantime, we advise investors to stay invested with regard to their long-term strategic asset allocation and stay the course.

Calum Brewster is head of UK regions at Julius Baer.