Stock markets have enjoyed substantial gains and until last September the rally looked set to continue. What upset the apple cart was the dismal outlook for global growth and the 10-year bond in the US offering in excess of 3%.
The trade war between the US and China, the issues with Huawei, and the issue surrounding Brexit, Italy, and the European elections then worsened the global growth outlook and put low global interest rate back on the agenda again. The US10-year bond yield is back at 2.15%, which allowing for inflation, is now no alternative to stocks.
And stock markets are holding up quite well considering. But all that could be about to change if bad news outguns the efforts of central banks to promote growth. The fears of a markets collapse and a long global recession are back.
The partnership, between the US and China, which has shaped global trade for 20 years, is breaking down. US administrations in the past have given the Chinese open access to the American economy, in the hope of furthering political freedom and economic liberalisation. It hasn’t worked. Trade talks have broken down and positions have hardened on both sides.
There seems only one remaining opportunity for compromise and that is the G20 gathering later this month. By the end of the summer, full sanctions will be in place. The outcome of the Huawei spat is massive for the global economy, as it will uncover US policy towards China and the Chinese response.
Many think the relationship between these two countries is a so-called Thucydides trap when an established power finds its interests are in conflict with those of a rapidly rising power. This could lead to a total breakdown in co-operation and a fall back to another cold war. That’s not a pretty analysis.
Moreover, US president Donald Trump is threatening tariffs on Mexico. This could get out of control very quickly. Trade wars are like a bar fight: Somebody throws the first punch but everyone ends up getting hit.
This is the backdrop to which the Brexit debacle is playing. I have commented on Brexit for years now and many times in this newspaper. I have always believed that a no-deal outcome is very unlikely due to the uncertainty and carnage it entails.
Remember the Germans sell the UK about €90bn of goods each year and buy €50bn. Surely, politicians will not jeopardise all this, will they? The best course of action was always to kick the can and hope the English mindset changes to staying in the UK. I believe we can still get there in the end.
What worries me more is the total destruction of the UK political system. I am not particularly politically minded, being from a trading background, which requires one to always backing the leading horse, but a stable government is a must.
There may be some very troublesome times ahead for those exposed to the UK economy. Uncertainty is the worst of all worlds and it seems we are in for more than our fair share. Kicking Brexit out a couple of years until there is some stable leadership would be the most welcome outcome for now.
On mainland Europe it has been quiet for a while but Italy is back questioning the fiscal rules. Does it matter? Probably not with the trade war escalating. Indeed, we may get some very expansionary tones from central banks to offset the damage caused by sanctions. Either way, it is going to be a hot summer.