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
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.
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.
Third, while Iran retaliated on Wednesday by launching more than a dozen missiles at US forces in Iraq, signs of restraint from Tehran, as well as Trump’s own aversion to US military intervention abroad, have convinced investors that an all-out war is highly unlikely.
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According to Eurasia Group, a political risk consultancy, there is a significant risk that the election will be perceived as “rigged” by a large proportion of the electorate. If Trump senses that he will lose, “he could attempt to manipulate outcomes ... in the name of ensuring election security. It will be the worst political climate for a national election that the US has experienced since the (effectively failed) election of 1876,” Eurasia warns.
A contested election, and potentially an ungovernable America, would take Trump risk to a whole new level.
Nicholas Spiro is a partner at Lauressa Advisory