Asian markets seemed to shrug off the G-7 upset over the weekend in early trading, which seems to be counterintuitive — but this week alone will see several events that could result in increased geopolitical risk.

Over the weekend the G-7 came up with a bland communique that acknowledged freedom, democracy and other shared values.  The language on trade went a long way to accommodate the US position: It advocated “free, fair and mutually beneficial trade.” While it insisted that “bilateral, regional and plurilateral frameworks needed to conform with WTO rules,” it also committed to modernize the WTO. It stated the need for “a truly level playing field, addressing in particular non-market oriented policies and practices.” 

So far so good. The language skirted around America’s acrimonious differences with Canada, Japan and EU countries on the subject of trade. What happened then bewildered the world. A firm statement by Justin Trudeau enraged the US president so much that he instructed his officials not to sign the communique. The result is that instead of alleviating trade tensions, they intensified. We are now closer to a vortex of retaliatory trade measures, which might well spiral into a full blown trade war. 

The Europeans will retaliate against US steel and aluminum tariffs with their own on bespoke goods such as peanut butter, whiskey, and motorcycles — all of which hail from Republican congressional districts Trump needs to secure in the upcoming mid-term election. 

On July 1, Canada will retaliate too. Trump’s next foray is likely to be cars, which would hurt Germany, Japan and Canada the most. If we go down a tit-for-tat route on trade, all bets for a “free fair and mutually beneficial” vision are off.

Emmanuel Macron said the “G-6” stand united against the US.  This is only partially true. Germany needs to protect its car industry. Shinzo Abe needs to ensure that when the US president meets North Korea’s Kim Jong-Un, he does not make unacceptable compromises, which could endanger Japan’s national security. Trump’s main objection is to huge bilateral trade deficits that some G-7 members like Germany and Japan have and other like France don’t. 

We are now closer to a vortex of retaliatory trade measures, which might well spiral into a full blown trade war. 

Cornelia Meyer

It is safe to say that the G-7 is under stress. It also has less economic clout than it used to have. Its members originally accounted for half of the world’s GDP; 45 years on, they account for less than a third. China has s urpassed Japan as the world’s second-largest economy and the G-20 framework — unwieldy as it may be — accounts for more in terms of economic clout and world population than the G-7.

Increased trade friction is certainly one of the geopolitical risks. There are others too. A lot will hinge on the Trump-Kim summit. The US has recently downplayed expectations, which is good.  Verifiable and irreversible denuclearization of North Korea will be a drawn-out process and involve multilateral mechanisms such as the UN’s International Atomic Energy Agency. Trump, a bilateralist, is bound to feel uneasy about that. The current security arrangements in Northeast Asia have US troops stationed in South Korea and Japan. These arrangements have allowed Japan, South Korea and Taiwan to become affluent. Whereas successful developments on the Korean peninsula are good for the world at large, the risk of the process becoming unhinged is a major threat to the global economy.

Europe may have a few surprises of its own. Italy has a new government consisting of two populist parties at the opposite end of the political spectrum. Markets have calmed down somewhat since the new Finance Minister Giovanni Tria affirmed that he had no intention of leaving the euro. 

Spain has a new minority government, which pundits think may not last till the end of the year. In other words, we may see more rumbles on the euro zone’s southern rim. 

This week the EU Withdrawal Bill will go to the House of Commons after major amendments from the Lords. 

Expect the FTSE and European markets to react to the deliberation. More importantly, the UK ought to reach agreement on Brexit with the EU by October and chances are slim that negotiators will get there. There are simply too many contentious issues, the Irish border being but one.

We can expect a June rate rise by the Fed, which will have its effect on emerging markets. Some held steady against a stronger dollar but others — especially those with big current account deficits — like Turkey or Argentina, suffered. 

Expect more emerging market turbulence this year.

So why are markets so calm? There is probably no point in pricing in event risk until it happens. 

However this week alone, there are plenty of events which could turn dicey. Decision-makers and investors need to be aware and vigilant.

  • Cornelia Meyer is a business consultant, macroeconomist and energy expert. Twitter: @MeyerResources