Wall Street strategists have a word of warning for investors hoping to recuperate this summer after a tumultuous stretch of market trading: Don’t rest on your laurels.

While the sunny season in Western Europe and the U.S. is typically characterized by lower trading volumes, a multitude of political risks from Brexit to trade frictions aren’t showing signs of letting up.

“We’re heading into a summer that is going to remain volatile,” said Andrew Sheets, Morgan Stanley’s London-based head of cross-asset strategy. “We have upcoming headlines on steel tariffs [and] China trade negotiations, we have NAFTA, we have an uncertain political backdrop in Italy, we have a new government potentially in Spain. There’s a lot for the market to digest.”

Sheets recommends “taking positioning down” and paring risk exposures to a “more neutral” stance. Even as jitters over Italy’s new populist government abate, the European Union’s ability to lead is already being questioned.

“Italy is the bigger uncertainty,” Sheets said.

Meanwhile, the stars may be aligning to extend the dollar’s lucky break — tightening financial conditions for overseas borrowers — and increasing prospects of volatility for embattled emerging markets.

“The dollar’s outlook over the summer remains bullish,” Mansoor Mohi-uddin, head of FX strategy at Natwest Markets PLC, wrote in a note. He cites Federal Reserve rate hikes, trade protectionism and the European Central Bank’s challenge to normalize policy amid political risks.

A fraught summer of Brexit negotiations, meanwhile, threatens to overtake Bank of England policy as the biggest driver of the pound, according to strategists at ING Groep. A summit with E.U. officials kicks off at the end of the month, with the U.K. still struggling to forge a proposal on post-Brexit customs arrangements.

For credit investors, it’s time to get defensive to “weather what is likely to be a relatively volatile summer,” said Wells Fargo strategists led by George Bory. They cite “heightened” concerns about trade wars, and the prospect of tighter monetary policy overshadowing an otherwise healthy economic backdrop.

There could be one silver lining: U.S. high-grade supply may continue to be unusually muted over the coming months thanks in large part to tax reform, according to Peter Tchir, the New York-based head of macro strategy at Academy Securities Inc.

 

Doff and Verma write for Bloomberg.