– Market turmoil as trade war concerns deepen and Trump appoints war hawk Bolton
– Oil, gold and silver jump as ‘Russia China Hawk’ Bolton appointed
– Oil up 4%, gold up 2.2% and silver up 1.6% this week (see table)
– Stocks down sharply – Nikkei down 4.5%, S&P 4.3% & Nasdaq 5.5%
– Bolton scares jittery markets already shell-shocked by US’ tariffs against China
– Currency wars and trade wars tend to proceed actual wars
– Gold now outperforming stocks year to date (see table)
Editor: Mark O’Byrne
1 Week Relative Performance (Finviz.com)
Gold and silver have gained another 1% today as market turmoil deepens on concerns about global trade wars and actual war after the appointment of uber hawk John Bolton as national security adviser.
In response to increasing economic and geo-political risks, key stock market indices have fallen sharply this week as investors again diversify into the safe havens of gold and silver. At the time of writing the Nikkei is down by 4.5%, the S&P by 4.3% and Nasdaq 5.5%. Gold and silver have climbed by over 2.2% and 1.4% respectively this week (see table above).
Gold is now outperforming stocks year to date (see table below). Year to date, gold is 2.5% higher while stocks have now turned negative and some are down very significantly for the year. The S&P is down 2%, the DJIA 4%, EuroStoxx 8.4% and the Nikkei 10% year to date (see table below).
Gold is again acting as a good hedge – exactly when investors need a hedge. We are in an environment of increasing and heightened uncertainty – conditions in which safe havens thrive.
America is on a path to war. Currently it’s a trade war, predominantly with China, but collateral damage is already showing itself. China has responded with its own tariffs whilst EU leaders are today meeting and trade is at the top of their agenda.
The appointment of war hawk Bolton has also confirmed Trump’s instinct to be aggressive in what are currently simmering geopolitical tensions – namely with Russia, Iran, North Korea and the “Elephant in the room,” America’s hegemonic rival China.
The appointment of “chicken hawk” Bolton has delivered further blows to both political establishments and fragile markets which were already nervous following tariff announcements.
As history clearly shows trade wars, currency wars and economic and geo-political sabre-rattling frequently lead to actual wars. Markets do not tend to like such conditions and they frequently result in sharp market corrections (especially in stock markets), in bear markets in stocks and indeed in financial crashes.
Trade War breaks out
Yesterday President Trump instructed Trade Representative Robert Lighthizer to place tariffs of $50 billion on Chinese imports. Beijing said they would fight any such move “to the end” and announced tariffs of $3 billion.
The restrained reaction from China suggests that there are likely to be further counter-reactions on the way. As we have found with the PRC’s dealings with the Trump administration, they like to take their time.
In the early hours of this morning Beijing called on the United States to “pull back from the brink”. In a statement the Chinese commerce ministry said:
“China doesn’t hope to be in a trade war, but is not afraid of engaging in one.”
At present there is a temporary stay-of-execution for the European Union and other nations in regard to the tariffs, making the focus on China perfectly clear. The lingering threat that controls could be implemented in a matter of months has alarmed leaders. Those in the EU have pushed trade talks to the top of their agenda, for today’s meeting.
According to Reuters, ‘The European Commission has proposed that, if tariffs are imposed, the bloc should challenge them at the World Trade Organization, consider measures to prevent metal flooding into Europe and impose import duties on U.S. products to “rebalance” EU-U.S. trade.’
Make America great again? Make it even poorer…
Trade wars are always dangerous and often pre-empt real wars. How this will play out will depend very much on what form tariffs end up taking. It’s most likely that it will be America that suffers the most, with a huge uptick in both producer and consumer prices.
The danger of this trade war is that markets really are unprepared for it. The other factor in the US this week was the Federal Reserve meeting. Markets have been prepared for its outcome for months. Whilst the tone might have been slightly more hawkish than expected, it was certainly not a major shock.
In contrast a trade war such as the one which appears to be coming is far from priced into complacent markets – especially U.S. stock markets which remain near all time highs.
Right now markets have little idea how these trade announcements will hit the US and global economy. The only thing for sure is that equity markets will likely bear much of the initial brunt. How long it will take for the Federal Reserve to respond is anyone’s guess, but it is likely to mess with with their carefully timetabled tightening of monetary policy.
Trade agreements came into their own following the Second World War, leaders saw them as a way to maintain peace between nations. The idea that if everyone had vested interests then they would be less likely to engage in damaging behaviour.
Tariffs are very often the bully’s response. They are preferred over months of renegotiation over multilateral rules. The presence of tariffs and controls significantly raise the risk of escalation of conflict as they break down the separation between commerce and national security.
This is where Trump may well be playing the long game. The appointment of war hawk Bolton suggests that the US President is well aware of where his provocations may get him. But, how will this play out with the electorate when they realise the dire economic and human consequences?
Bolton’s appointment is at odds with the electorate and Trump’s promises