This Was the Week the World Got Really Anxious About Globalization's Future
Weak global trade, fears that the U.K. is marching towards a hard Brexit, and polls indicating that the U.S. election remains a tighter call than markets are pricing in have led a bevy of analysts to redouble their warnings that a backlash over globalization is poised to roil global financial markets—with profound consequences for the real economy and investment strategies.
From the economists and politicians at the annual IMF meeting in Washington to strategists on Wall Street trying to advise clients, everyone seems to be pondering a future in which cooperation and global trade may look much different than they do now.
Suggestions that the U.K. will prioritize control over its migration policy at the expense of open access to Europe's single market in negotiations to leave the European Union—a strategy that's being dubbed a "hard Brexit"—loomed large over global markets. The U.K. government is “strongly supportive of open markets, free markets, open economies, free trade,” said Chancellor of the Exchequer Philip Hammond during a Bloomberg Television interview in New York on Thursday. “But we have a problem—and it’s not just a British problem, it’s a developed-world problem—in keeping our populations engaged and supportive of our market capitalism, our economic model."
Citing the rising anti-trade sentiment, analysts from Bank of America Merrill Lynch warned that "events show nations are becoming less willing to cooperate, more willing to contest," and a backlash against inequality is likely to trigger more activist fiscal policies. Looser government spending in developed countries—combined with trade protectionism and wealth redistribution—could reshape global investment strategies, unleashing a wave of inflation, the bank argued, amid a looming war against inequality.
U.S. Treasury Secretary Jack Lew did his part to push for more openness. During an interview in Washington on Thursday, he said that efforts to boost trade, combined with a more equitable distribution of the fruits of economic growth, are key to ensuring U.S. prosperity. Rolling back on globalization would be counterproductive to any attempt to boost median incomes, he added.
Without mentioning him by name, Lew's comments appeared to nod to Donald Trump, who some believe could take the U.S. down a more isolationist trading path should he be elected president in November. "The emergence of Donald Trump as a political force reflects a mood of growing discontent about immigration, globalization and the distribution of wealth," write analysts at Fathom Consulting, a London-based research firm. Their central scenario is that a Trump administration might be benign for the U.S. economy. "However, in our downside scenario, Donald Dark, global trade falls sharply and a global recession looms. In this world, isolationism wins, not just in the U.S., but globally," they caution.
Analysts at Standard Chartered Plc agree that the tail risks of a Trump presidency could be significant. "The main risk with potentially tough negotiating tactics is that trade partners could panic, especially if global coordination evaporates." They add that business confidence could take a big hit in this context. "The global trade system could descend into a spiral of trade tariffs, reminiscent of what happened after the Smoot-Hawley tariff of 1930, and ultimately a trade war, possibly accompanied by foreign-exchange devaluations; this would be a ‘lose-lose’ deal for all."
Market participants are also concerned that populism could take root under a Hillary Clinton administration. "We believe the liberal base’s demands on a Clinton Administration could lead to an overly expansive federal government with aggressive regulators," write analysts at Barclays Plc. "If the GOP does not unify, Clinton may expand President Obama’s use of executive authority to accomplish her goals."
No matter who wins in November, Citigroup Inc. Head FX Strategist Steven Englander warns that investors are failing to hedge against rising event risks, with the U.S. election serving as a possible stress test for global markets. "If everyone is positioning to pull the trigger on positioning as soon as they know the outcome, the repressed volatility may emerge in a very sharp burst," he points out.
Amid political attacks on the apparent inequities generated by monetary policy in the U.K., sluggish trade challenging Chinese growth, and the rise of populist movements in Europe, there are plenty of reasons why market players should snap up volatility hedges, analysts say.
"In our view, volatility is going to heat up in the coming months given the U.S. election, China's potential response against a stronger currency, and Italian political risks," concluded Martin Enlund, chief currency strategist at Nordea Markets.