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. The Federal Reserve’s decision last year to execute one of the most stunning policy pivots, cutting interest rates three times after signalling that it would raise them, has encouraged other central banks to be more accommodative and has helped ease concerns about a global recession. Second, and just as importantly, the Brent crude price is less influential in shaping sentiment than it used to be. This is because the development and production of shale in the US as an alternative source of supply has surged, reducing the world’s dependence on Middle Eastern oil. 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. However, Trump’s unpredictability and recklessness are significant risks in their own right. For far too long, markets have been in thrall to the Twitter feed of a president whose erratic behaviour and impulsive decision-making make any of his announcements or pledges wholly unreliable. China’s African envoys take Twitter tips from Trump in PR offensive If the US military itself is worried about the consequences of Trump’s actions within Iran and across the Middle East – the Pentagon is concerned about an expulsion of American troops from Iraq and rejected Trump’s threat to bomb Iranian cultural heritage sites , a violation of international laws on armed conflict – Beijing should be wary of signing a “phase one” trade deal just as the US election campaign shifts into higher gear. It should be clear to investors by now that the policies and actions which Trump trumpets as “big wins” for his administration are cosmetic, poorly thought through and often counterproductive, particularly in the case of Iran, which will now seek to revive its nuclear programme . Still, Trump remains popular among his Republican base, and can count on his party’s control of the Senate to acquit him following his coming impeachment trial. Indeed, the biggest risk stemming from the president’s unpredictability is the one that investors will soon have to contend with: the uncertain outcome of November’s crucial presidential election. Although it is still unclear who Trump’s Democratic opponent will be – former vice-president Joe Biden has the best chance of winning the nomination, according to the prediction markets – the campaign is bound to be ugly and divisive. China rejects Trump’s call to investigate Joe and Hunter Biden 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 Purchase the China AI Report 2020 brought to you by SCMP Research and enjoy a 20% discount (original price US$400). This 60-page all new intelligence report gives you first-hand insights and analysis into the latest industry developments and intelligence about China AI. Get exclusive access to our webinars for continuous learning, and interact with China AI executives in live Q&A. Offer valid until 31 March 2020.