Donald Trump’s erratic actions on Iran should give China pause as it prepares to sign a ‘phase one’ trade deal with the US

The US president’s latest move should make it clear to China – and investors – that his decision-making will be more unpredictable in an election year

Investors will also have to contend with the uncertain outcome of the US presidential election with no clear Democratic contender having emerged so far

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Chinese Vice-Premier Liu He meets US President Donald Trump in the White House in Washington on October 11. Photo: Reuters

Published: 11:00pm, 9 Jan 2020Updated: 8:13pm, 17 Feb 2020

Financial markets have long been accustomed to the “Trump risk”. Having wrongly assumed that Donald Trump’s victory in the November 2016 presidential election would trigger a disorderly sell-off – the benchmark S&P 500 equity index actually rose 5 per cent during the transition period leading up to Trump’s inauguration in January 2017 – markets have since gotten used to the unpredictability of his presidency.

Yet, the willingness of Trump to test the resilience of asset prices is so brazen that a sharp and sustained sell-off has become increasingly likely.

Trump’s latest provocation was his controversial decision last week to launch an air strike on Baghdad airport that killed Major-General Qassem Soleimani, the second-most powerful official in Iran who oversaw the country’s extensive influence across the Middle East. The assassination, which has led to a dramatic escalation in tensions between Tehran and Washington, shows the extent to which Trump is willing to endanger global peace as he gears up for re-election.

Markets, which last year enjoyed the strongest gains in stocks and bonds since 2010, have begun the year in a jittery mood. The price of Brent crude, the international oil benchmark, has gyrated wildly over the past few days because of fears of supply disruptions, while gold, the ultimate haven in times of international uncertainty, has risen to almost US$1,560 an ounce, its highest level since April 2013.

However, broader sentiment remains remarkably buoyant. The S&P 500 has risen since the killing of Soleimani, the VIX Index – Wall Street’s so-called “fear gauge” which measures the implied volatility of the S&P 500 –remains below its long-term average of 19 points, while the closely watched US corporate bond market continues to rally.

There are several reasons for the enduring calm. The most important one is extremely easy financial conditions, particularly in developed economies, stemming from the ultra-loose monetary policies of the leading central banks.