The three things businesses and investors need to know this week
- Market and business uncertainty does not seem to be subsiding, as tariffs continue to shift fast
- Market dislocations (borrowing costs up, US Dollar down) are suggesting that some market participants might be moving away from dollar assets as safe havens.
- As days pass, uncertainty may well be built as a longer-term factor in business and investment planning. This could cause markets and investors to seek “bubbles” of safety.
Check out our Tariff Hub for updates as we monitor this historic economic and geopolitical shift, as well as the repercussions for businesses and markets.
Summary
As trade wars continue, businesses and investors are seeing volatility and uncertainty rise exponentially. Financial markets are experiencing dislocations, which, if continued, could invite an intervention by the US Federal Reserve. Some market participants, in fact, think that this is now required anyway, to calm nerves. While the probability of a financial crisis is not particularly high, as central banks have learned the lessons of the past and can guarantee liquidity, the economy has no such safety net. The post-WWII liberal economic and financial order is facing a major challenge, as the US and China enter the most dangerous phase of ending their unwilling co-dependency. It is still very difficult to imagine the next regime, as no such planning exists. So, investors and businesses are looking for pockets of safety and stability. Some of it can be found in central banks. Some in more secure legal regimes, such as Europe. Whatever the case, the more days pass with such unusual uncertainty, the wider the long-term repercussions for business planning in the next few years.
Trade wars continue
Looking to make sense of it all, we realise that investors and businesses don’t want the news flow or even the exact answers. The news is manic, and illuminating answers are unavailable. Instead, what everyone looks for, is “the bigger picture”. Where do we go from here? And whereas the long-term answer is difficult, over the medium term, a world that is becoming increasingly fatigued with White House uncertainty is looking for someone to wave the flag for the liberal economic and financial order we knew as our reality until a few months ago.
On “Liberation Day”, 2nd April, the world and financial markets were shocked to see the US retreating from the global economic, financial and geopolitical construct it had carefully devised and painstakingly built up after the Second World War and the fall of the Soviet Union.
The result of imposing the highest tariffs in over a century across the globe has been a precipitous drop in equity prices and very high financial market volatility.
More importantly, investors have noticed significant economic dislocations. The US Dollar, the world’s reserve currency, continues to drop, despite the initial inflationary impact of tariffs (which, all other things being equal, should mean higher interest rates). At the same time, US borrowing costs are moving higher.
This particular move was disconcerting. These two assets (dollars and borrowing costs) usually move together. If, for example, markets think that the Fed will raise rates, both the Dollar and borrowing costs will rise, and vice versa. On some occasions, we could see the yields hovering lower and the Dollar higher. It would be in times of higher risk, when investors would rush to buy both the US debt and US currency, due to their safe-haven status. The selloff of both assets at the same time signals exactly the opposite: the potential loss of that “safe asset” status quo reserved for the biggest economies in the world.
To be sure, we are very far from the Dollar’s retreat as the global reserve currency. Over 57% of global reserves are still in Dollars.
And while the Euro has unexpectedly picked up, it is difficult to imagine emerging market consumers rushing to buy either the European common currency or the Renminbi in times of crisis
As for the bond movements, speculation is rife that hedge funds unwound leveraged positions or that China might have sold off some of its Dollar holdings (which account for roughly 2.2% of total US debt).
Still, the dislocations were enough to give the White House pause. The President announced the delay of extra tariff implementation for 90 days (but still maintained 10% tariffs across the board) for everyone but China, with whom essentially trade has stopped. He shook up his economic team, which is now led by Scott Bessent, who markets consider thus far a level-headed actor, while Commerce Secretary Howard Lutnick and trade advisor Peter Navarro are confined to more auxiliary roles. Elon Musk, Head of the Department of Government Efficiency and a close ally to the President, even went so far as to state that he would like a free trade zone with Europe.
For many in the markets, this was a signal that the White House “blinked”. In other words, the pressure from financial markets was enough for the President to tone down some of his aggressive rhetoric. This notion was further enhanced by a moratorium on import tariffs from China. Yet, late on Sunday, the White House moved quickly to disabuse any notion of a potential return to stability, as both Mr Lutnick and the President emphasised that tech/semiconductor tariffs would eventually be returning.
Where are we left after a tumultuous ten days? America’s trade war is now focusing mostly on China, with the two countries escalating tariffs to the point where trade between them ceases altogether. It marks a very dramatic end to the trade relationship that defined the first quarter of the 21st century.
Policy uncertainty continues to climb. Businesses and markets are still weighing the answer to the most important question for now: whether what we are experiencing is deliberate and planned “negotiation with everyone about everything at the same time” with clear but uncommunicated expected outcomes, or the product of big strategy objectives (re-industrialise the North, assert America’s primacy, reduce debt burdens, close trade deficits) driven by the power of personality and lacking a coherent tactical implementation.
However, this isn’t a newspaper. And the data will likely change very soon again in the next few hours. To jump ahead, we need to recognise pillars of stability in an increasingly unstable world. Thus far, we see two: The Fed and Europe.
Markets are waiting for the US Federal Reserve’s intervention, or at the very least the affirmation of the Fed Put, a reminder that when market stability is threatened, it will step in to buy assets. The most important global economic and financial agent, the central bank issuing the global reserve currency, is slow to respond, as it is also in a fight for its independence. A few days ago, the US administration asked the Supreme Court for the right to fire heads of independent agencies, which would include Jerome Powell. And while we can’t speculate on SCOTUS’s answer, we must assume that the Fed’s fight to maintain its independence against its own government may be, at best, a drawn-out affair.
The more secure bet, markets have been telling us, is Europe. As China and the US fight for primacy in this “post-liberal trade order”, the unexpected winner, so far, is Europe (including the UK). Already, Germany abandoned a mercantilist trade approach and embraced fiscal expansion, with France potentially expanding its nuclear umbrella. European and British assets and currencies have picked up significantly since inauguration day. The UK is moving strategically closer to the EU, creating the first true post-Brexit opportunity out of a crisis. Anecdotally, businesses increasingly raise some concerns, looking to move operations to the EU and the UK, as they feel the environment offers more certainty. It makes sense. Strategically, it should not be inconceivable that, as the two global economic behemoths, the US and China, weaken each other economically, the third economic power, Europe, emerges as a pole of long-term liberal-order systemic stability.
Europe has its own internal disagreements and architectural issues. But every day we move away from the pre-tariff liberal world order could be a day where more investors trust the German Bund and the Euro over the US Treasury and the Dollar.
While the US consumer is central to the global economy, businesses need to survive, and so do investors. Right now, everyone is holding their breath. But it’s unlikely they will (or can) do so forever. Business leaders need to be able to forecast something in order to function. Portfolio managers will seek to reduce volatility in line with their mandates. Every day that passes will be a day where investors and businesses will factor in the persistent White House uncertainty, looking for ways to move away from it and to find pockets of relative stability, with the hope that the US will eventually return to the world it has built.
In the next few months, we will continue to monitor the situation for all our business and investment clients, with updates available at our Tariff Hub.
