Volatility is back and here to stay
This was a big weekend for macro-economists with central bankers meeting in Jackson Hole and the G7 leaders in Biarritz. There were tweets from US President Donald Trump before he even boarded the plane to France and emollient comments calming things down later. Volatility is back — big time.
On Friday Fed chairman Jerome Powell gave a speech in Jackson Hole, but he gave noting away. He said that the Federal Reserve would watch economic indicators and then decide what to do with interest rates. That was prudent — the hallmark of a central banker. The Fed is divided with the chairs of the regional Federal Reserves for Kansas, Philadelphia and Boston opposing lowering rates or loosening the purse strings and heavy weights such as Robert Kaplan, chairman of the Dallas Federal Reserve, concurring with Trump that rates should go down. The situation was not helped when Donald Trump asked in a tweet whether Chinese President Xi Jinping or Powell was the bigger enemy of the United States. This did little to give confidence, because the independence of the central bank from the executive and day-to-day politics is an important benchmark in how economists and investors assess an economy and its markets.
To make matters worse Trump hiked tariffs on Chinese imports by 5 percent in retaliation of Xi Jinping levying tariffs on $75 billion worth of US imports. The trade war looked full on and markets took a nose dive on Friday, the Dow closing down more than 2.3 per cent. Oil was hit too. Fixed income yields tumbled further leaving the question open, where the finish line of the race to the bottom would eventually be drawn. The price of Brent dropped by 5.5 per cent between the highest point on Wednesday and lowest on Sunday. On Monday it recovered some in early morning European trading reaching 58.7 dollars per barrel.
The world, not just the United States and China need to see the trade disputes put to bed once and for all
Where there are losers there are always winners and investors fled to the traditional safe havens gold, the Swiss Franc and the yen. Gold reached its highest valuation per ounce since 2013 and is up 20 per cent since January of this year. The yen is particularly attractive, because economists feel that the Bank of Japan may have exhausted its options for further quantative easing or lowering rates into even further negative territory.
Investors in Asia woke up to a sea of red on the international stock markets. As always with President Trump, there were twists and turns. On Sunday he announced a trade deal with Japan giving broader access to US agricultural produce to the land of the rising sun in return for not hiking import tariffs on Japanese cars at this time. That was nice, but did little to change sentiment. However, markets liked it when the President came out on Monday morning saying that the US had received two phone calls from the Chinese leadership and that they were sincere in wanting a resolution to the trade dispute. Trump said he felt a deal could be done.
What to make of angst and optimism following each other in ever shorter intervals, imitating the movements of a yo-yo. For one, volatility is back. Secondly, observers should look at long-term trends rather than hectic changes in sentiment. In the longer term both China and the US need to resolve the trade situation. Trump has an election coming up and needs a growing economy. China needs to keep its export sector going. Thirdly we should discount statements that are too bold to be realistic, such as when the US President tweeted that he will forbid US companies to purchase Chinese goods citing an obscure law from the 1970s. Fifthly, and very importantly, it is hard for policymakers, especially central bankers to react to every twist and turn of the evolving story. That is simply not their job. After the global financial crisis of 2008 central banks grew their balance sheets and lowered interest rates, some failing to tighten the belt or raise rates. They are quickly approaching the limits of what they can do. In his speech in Jackson Hole, the governor of the Reserve Bank of Australia, Philip Lowe, eloquently highlighted the limits of what central banks could do to stimulate the global economy at this point in time.
These international gatherings and statements by heads of state have a wide-ranging impact on markets across the world. GCC is not immune. Trade wars affected companies such as DP World who depend global trade. Stock market wobbles affected sovereign wealth funds who are heavily invested in global equities. The oil price is affected by trade wars, because the immediate result of the localisation of supply chains is lower demand for oil, which is still the premier fuel for transportation.
Indeed the Dubai stock exchange was down 1.9 percent in early Monday trading, the Tadawul even 2.4 per cent. There is a real danger that the macroeconomic wobbles might off set the benefits of the Tadawul’s inclusion in the MSCI emerging markets index. The Saudi exchange was up 10 per cent in May when the first tranche of the process brought $7 billion of foreign capital to Saudi Arabia.
In other words, the world, not just the United States and China need to see the trade disputes put to bed once and for all. However, we should be aware that the days of January 2018 are long gone. Then the IMF forecasted the Goldilocks scenario of 3.9 per cent synchronized economic growth across the globe. We will not see similar forecasts return any time soon. Going forward, expect the waters to be choppier.
• Cornelia Meyer is a business consultant, macro-economist and energy expert.