Current Affairs

Once the stock exchanges around the world crashed last week, the US Treasury secretary argued that most of the investors in the exchange whose pensions were on the line were down only 40 percent, but the majority of those with pensions on the line were hammered by US bonds failure to sell. It was argued that the bonds held internationally are to a large extent responsible for the failure of the treasury auction on 7^th April, because the US is leveraged to the hilt and investors have refused to invest further. But that would not really explain why institutional investors did not pick up on the safety of the bonds – unless of course the international markets did threaten to release $25 trillion of bonds held internationally.

What Trump did in unsettling the markets last week was to challenge states to re-address the status quo. It was not realistic that countries such as China, (a major bond holder of US treasuries), ran from the dollar and was forced into an imagined currency war.

The lack of confidence in the markets led to questions of liquidity where US government bonds were treated with suspicion right across the world. Chief executives of large firms across Europe have been tasked with de Americanising their assets and according to Richard Milne, asset managers are being asked to look at the risks and the best way to mitigate these risks. But the idea of decoupling from the US market is difficult, especially where technology is concerned, but bankers have their own arguments about decoupling from the US market because of the high cost of doing business in America and the likelihood of litigation.

Gillian Tett, writing in the Financial Times interviewed Ed Yardeni a macro strategist who argued that “Trump’s team are playing with liquid nitro.”

But it is the world turning from America, which has mostly ignited the debate about whether it is worth doing business with an unpredictable President and the fiscal policy he is pursuing. Britain is already talking with Europe and there is a realisation that business with the US is beyond the remit of the UK treasury.

In many ways Donald Trump escalated the trade war with the tariffs that he imposed believing the US was immune from international markets because of its size. The idea that the US was in a strong enough position to challenge the markets proved short lived as six trillion dollars was wiped off the NASDAQ and DOW Jones. Though the reprieve announced by Trump was welcomed and four trillion was recovered by the markets, investors realised that the US president was continuing to manipulate the US markets, which led to the Bank of England saying “the global risk environment has deteriorated and uncertainty has intensified….”

Hedge funds were caught out and forced by Wall Street Banks to provide more money to back up their loans. Gold has been picked up by investors looking for a tangible escape from the staples. Further more guaranteed returns from minerals such as oil, have largely been undone by OPEC (Saudi Arabia) releasing reserves. The oil markets are depressed, so investment in this market is stagnant. Investors have run to gold, which is up, but there are questions whether the gold market is overheating.

Though Trump has steadied the ship over the sanctions and made special dispensation for mobile phones, there are still 20% plus sanctions internationally. The concept that Trump did not really have a plan is obvious, but the unpredictability of the US position on trade is challenging the US economy and though the likelihood of a US recession has diminished by a few percentage points, there is a realisation that Trump has no plan what-so-ever economically and this challenges economists who are trying to predict US alignment.

Though the trade war is really between China and the US, international markets have been hammered by Trump. His refusal to lift tariffs on the car industry has led to ports in America holding the cars, rather than processing the cars through customs. Companies like JLR, Mercedes and others are confident that the US market place is well provided and have begun diverting their stock into other market places.

The realisation that Trump is reckless in managing the world-economy with his revival of 19^th century type tariffs to re-imagine a 19^th Century manufacturing economy, challenges investors. There are questions about the ability to reset their economy in this way and questions of whether a president who runs hot and cold over a few hours can really manage the re-design of an industrial policy.

The finality of Trumps arguments do not exist. The afterthought is very much part of the remit of his government, especially when statistics such as the US being dependent on China for 73% of its smartphones, 78% of its laptops and 87% video game consoles.

China seems to be talking to other countries to shore up trade agreements. China’s commerce minister Wang Wentao, said in talks that “they are willing to work with trade partners in ASEAN to strengthen coordination.”

Wang Wentao went further and spoke to the EU trade and security commissioner saying China was willing to deepen trade, investment and industrial cooperation. The Chinese also opened up negotiations with Oceania an important market for trade, but Australia’s trade secretary said that he was looking to “diversify trade.”

Trump has suspended the sanctions for ninety days, but the damage has been done, the markets are down by four percent since his presidency has come into effect. But it is the unpredictability of his arguments that are leading to the large swing in market conditions, just when investors believe there are trade deals – barriers put up, and though the US is pushing 10% tariffs across the board the argument Trump has with China is intensifying, so whether the world economy will manage to realise calm, will only be for ninety days before the unpredictability of Trump is once again ignited.