Financial markets are trying to get used to a new world – one where the old rules of interdependence and co-operation have been replaced by aggressive posturing and negotiating positions. The question investors are struggling to answer is just how far this will go.
When does posturing turn into policy? At the moment the omens have them worried.
The latest example is the US-China trade war – possibly now turning into something more, as China lets its currency fall and US president Donald Trump accuses it of manipulation. China was, of course, a prime target of Trump's rhetoric during the presidential election campaign, but investors thought that after his election, while this might create rows, saner voices would intervene.
But in recent months Trump has upped the ante and his latest surprise move to impose another round of tariffs – special import taxes – on Chinese imports have brought tensions to a new level. China retaliated with further tariffs on US goods and by letting its currency depreciate a bit, which gives its exporters an advantage on US markets and hits US firms selling to China.
Beijing will have done this in the sure and certain knowledge that this is a red rag to the bull in the White House.
China sets a reference rate for its currency every day – long a cause of ire in Washington which has accused it of letting the currency weaken to make its exports more competitive. Trump took this a step further on Tuesday by accusing China of “currency manipulation”. While this can be investigated by the International Monetary Fund, the real import of the move is political.
Tensions
We are now on the brink of what might be called an economic war between the world’s two biggest economies, involving damaging trade and currency tensions and maybe more. Remember all the stuff in the background, too, like the US moves against Chinese telecoms giant Huawei, part of a murky war over control of that most valuable of commodities – information.
There are many other ways this economic conflict could escalate. China could start to sell some of its massive holdings of US government debt, for example. Or Trump could put pressure on the US Federal Reserve to intervene to weaken the US dollar on world markets.
And the irony is that while it is the last thing the delicate world economy needs, politics, particularly in the US, seems to be pushing Trump on to seek a "win", even if the net impact of all this is negative and the risks are huge. It is a lurch back from the acknowledgment of global interdependence which has prevailed for many years, underpinned in the trade arena by the World Trade Organisation. This was not all sweetness and light, but policy was generally driven by the view that the rising tide would lift most of the boats – though of course part of the problem was that big business hoovered up a lot of the gains.
The same aggressive, populist tendencies are driving the move to a no-deal Brexit. Just as markets are asking whether Trump will keep upping the ante with China, investors are wondering whether Boris Johnson will really press the button on a no-deal Brexit. They are starting to believe that the new prime minister really may go for it, perhaps then hoping to call an early general election before the extent of the damage is clear.
Who knows, but if investors start to be convinced that a no-deal Brexit is on the way, then just watch sterling fall.
Brexit
As with Trump, Johnson seems prepared to run the risk of imposing tariffs and other trade barriers which will be hugely damaging to the UK economy. Despite the extraordinary interdependence of international economies, leaders such as Trump and Johnson seem prepared to roll the clock back to an earlier, beggar-thy-neighbour era. Or will a lot of it turn out to be bluster? Right now, it doesn’t look like it. And when economic reality hits, perhaps it will be too late.
Perhaps the most telling sign of the uncertainties caused by this mix of new, aggressive nation-state economics combined with a sluggish post-crisis world economy is seen in the market for government debt. Did you notice that the interest rate on Ireland's 10-year government debt went into negative territory this week? This is not because we are special – an astonishing $15 trillion in debt is now traded at negative rates worldwide, on Bloomberg calculations.
The message is that investors are fleeing risky assets and are sticking their cash into safer havens, even if it is going to cost them a small bit of their capital. They have decided they aren’t quite sure what is happening in this new, dog-eat-dog, economic order, but it is now making them very nervous.
For investors, it is an almost impossible outlook, with no return on deposits or bonds and stockmarkets looking shaky. The old trade-off between risk and reward seems to have been replaced by a new one – between risk and no-reward.
