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He came, he saw, he destroyed. That is the legacy that US President Donald Trump seems to be leaving behind after the first few months in office. The way markets have reacted to Trump's reciprocal tariff, one would get the impression that the pandemic is back. In a way, that is what the tariffs have done: destroyed the world order and made countries operate in isolation. It's everyone for themselves and the devil takes the weak.
Global financial markets have panicked in such a scenario where the addressable market has suddenly shrunk. Since China decided to give the US a taste of its action, markets in equity, commodities, energy, and cryptocurrencies have crashed.
At the time of writing, only the Asia Pacific markets were open, but the view was scary. Some markets had to be halted momentarily as they hit the daily circuit filter while others are trading sharply lower. Some markets have entered the bear phase today.
Manas Chakravarty says here that Trump's tariffs are a structural weapon to force global economic realignment. The system built on US consumer demand and the dollar as global lubricant is under siege.
A new world order is being created as we speak. Vivek Kelkar points out here that a deeper shift is under way, with economic nationalism replacing the old free trade consensus. Policymakers in every country are navigating their interdependencies and looking for alternative solutions. Markets do not like such an opaque scenario and have reacted with their feet.
Two of the biggest players in the world are at loggerheads trying to create market space and power for themselves. A handful of countries, like Israel, have taken sides and fallen in line with what Trump wants; some others have decided to take the battle to American ports. Most others, like India, are trying to balance the situation by sitting at the negotiation table and reducing the trade deficit with the US, which is what this crisis is about.
India has oil as a negotiating tool to reduce the deficit. It can increase its imports from the US while reducing it from Russia or other countries and bridge the deficit to some extent. However, this will create an imbalance in the market as Russia and other OPEC players dump their produce.
The same is true for most products. European countries are bracing for a deluge of Chinese products that can find their way onto their continent after the US imposed tariffs. European manufacturers have been reeling under pressure ever since the US imposed tariffs on the continent. Ravi Ananthanarayanan has elaborated the risk to metal prices.
Given the fluid situation, it is difficult for countries to plan for the future. The entire ecosystem has been destabilised by the so-called reciprocal tariffs. If countries do not have visibility of growth, how will companies residing in them have that insight? Markets' biggest fear is that it will take months for the dust to settle down. The hope is that a Fed pivot would come to the rescue, as Anubhav Sahu writes.
Under such an unsettled scenario, it is better to protect your capital, and that is what investors are doing by withdrawing it from risky markets.
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Markets
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Shishir Asthana
Moneycontrol Pro
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