FROM one crunch to another, markets are finding it hard to catch a break as we go from tit-for-tat trade wars one day to US government shutdown fears the next.
Today I’ll take a look at how all of the US policy uncertainty and diplomatic upheavals have sparked a conversation in global investment circles about trust and transparency in US governance and how eroding that could undermine the US position as the world’s dominant investment destination.
President Donald Trump threatened on Wednesday to escalate a global trade war with further tariffs on European Union goods, as major US trading partners said they would retaliate for trade barriers already erected by the US president.
Germany’s outgoing lower house of parliament will hold a special session on Thursday to debate a 500 billion euro fund for infrastructure and sweeping changes to borrowing rules in Europe’s largest economy to bolster defence.
The Bank of Canada trimmed its key policy rate by 25 basis points on Wednesday to 2,75 percent and raised concerns about inflationary pressures and weaker growth stemming from trade uncertainty and US tariffs.
The Kremlin said on Wednesday it would review details from Washington about a proposal for a 30-day ceasefire in Ukraine before responding, while US Secretary of State Marco Rubio hoped a deal would be struck within days.
US consumer prices increased less than expected in February, Wednesday data showed, but the improvement is likely temporary against the backdrop of aggressive tariffs on imports that are expected to raise the costs of most goods in the months ahead.
Can’t catch a break
This week’s US metal tariff hikes and the instant retaliation from Europe and Canada are likely only the opening salvos in a global trade conflict that President Donald Trump appears intent on ratcheting up in less than three weeks’ time.
The rhetoric shows no sign of compromise.
“Whatever they charge us, we’re charging them,” Trump told reporters at the White House. “We will not stand idly by,” Canada’s Finance Minister Dominic LeBlanc said of the latest tariffs moves.
There is background tension in Europe too as Germany’s dramatic fiscal reforms and defence reboot now need to pass through parliament, with the Green Party’s necessary support still not secured.
The Bundestag lower house of parliament will on Thursday hold the first reading of the proposal, which electrified European markets last week.
A vote is due next Tuesday.
Back stateside, the focus will be on the Senate. If it doesn’t support the Republican-backed stopgap funding bill, a partial government shutdown could be triggered as soon as this weekend.
The whole picture means US stock futures have reversed all of Wednesday’s modest bounce in the S&P500 (.SPX), opens new tab. And stock benchmarks across Europe and Asia are also in the red.
trade, but gold climbed within US$10 of its record peak.
Meanwhile, Treasury yields pushed higher, batting away better-than-forecast consumer price inflation numbers on Wednesday, as the tentative stock market stabilisation reduced Federal Reserve easing bets once again.
The dollar index was also off slightly.
CPI numbers are now very much in the rear-view mirror for a Fed waiting to see the impact of tariff hikes, so today’s producer price numbers should also have little market impact.
But what could have quite a bit of market impact over the long term is the growing sense that the tumult in Washington could threaten the US position as the world’s safe haven.
Exorbitant disruption risks undermining US ‘privilege’
There’s something more than US tariffs and recession risks gnawing at financial markets. There’s the growing sense that the chaotic policy disruption in Washington is eroding the world’s trust in US institutions and its assets.
Broken political alliances and economic wars with major trade partners are having many effects – not least heightened business uncertainty over what will happen next – but one of the most notable is the brewing investor concern that America could lose a chunk of its “exorbitant privilege”.
This term, first coined in the 1960s by then French finance minister Valéry Giscard d’Estaing, essentially refers to the benefits the US gains from the outsize demand the world has for U assets as a safe haven.
The privilege hinges variously on the extensive use of the dollar internationally, the US rule of law and institutional rigor as well as the projection of its soft power.
The list is much longer than that, but you get the picture.
The sheer size, depth and transparency of US markets, in combination with the reliability and openness of its governance, have – for decades – given the US a disproportionate slice of world capital and the cheaper financing that goes with that.
Could Donald Trump’s avowedly disruptive administration call all that into question and whittle this advantage away?
Financing metrics, such as long-term US borrowing costs, don’t yet suggest that a major fracture is afoot.
But US equity prices have started to correct over the past month, even as the dollar has weakened – an ominous combination.
Ultimately, though, the very fact that trust – or the lack thereof – is part of the US conversation at all is the most remarkable thing.
On Wednesday, JPMorgan’s chief global economist Bruce Kasman spoke openly about the challenges during a roadshow in Singapore. He opined about how the US secured its “exorbitant privilege”, citing many of the reasons noted above and including things like the “integrity of information flow”.
The administration’s cutbacks to government agencies and moves to disband the advisory committees assisting with data collection are also potentially jarring, he said.
“All of those things are part of the uncertainties that have moved into US policy, and that part of the risk in the outlook this year I don’t think has been appreciated.”
‘Exorbitant burden’?
Referring to exorbitant privilege, Kasman added: “The risk that stuff starts to come under pressure and becomes a structural issue in the markets is not something I would, by any means, underplay.”
This is likely what investors and strategists both within the United States and around the world have been thinking for weeks – even if relatively few have verbalised it.
And Kasman is not alone in saying something.
Writing about speculation surrounding the prospect of a “Mar-a-Lago Accord” to correct US deficits and global imbalances, former Reserve Bank of India governor Raghuram Rajan, opens new tab questioned the diagnosis of Trump adviser Stephen Miran and said it was dangerous for America to play around with its exorbitant privilege.
Rajan expressed doubt that reforming US macroeconomic policy would somehow deter overseas savers from the U.S., thereby weakening an overvalued dollar or helping to cut US deficits.
“It is not clear where the Trump administration’s current path of ‘shock and awe’ is supposed to lead,” the former International Monetary Fund chief economist wrote in Project Syndicate this week.
“The claim that the dollar’s attractiveness is an exorbitant burden rather than an exorbitant privilege is unpersuasive, especially when those making such arguments are so reluctant to give up the burden,” he said, referring to the administration’s regular support for the dollar’s global status while promoting policies that undermine it.
“Markets are unnerved by the punishment that the administration, convinced that the US is a victim, is willing to inflict on close allies,” he concluded.
“If such behavior reduces the attractiveness of the dollar, perhaps it really will become an exorbitant burden. But that is not a future that any American should want.”
It’s good to remember that foreign holdings of US financial assets nearly doubled over the past decade to some US$60 trillion before the recent market ructions.
Given the scale of this cross-border money, if faith in the US truly is shaken, the outcome could make the year’s market shakeout to date seem very small indeed.— Reuters
