US President Trump continues to escalate things further, most recently directing his ire against Mexico. As is so often the case, while the reasons he gave may seem plausible, higher customs tariffs are not about to solve the migration problem. Moreover, the announcement of higher customs may need to be seen in connection with ever louder calls for impeachment proceedings against him to commence. We can hardly expect that, going forward, the many disputes are likely to all be solved. And even if they were, the global economy is already being damaged.
In Euroland, the Italian government now refuses to hold back. Following his success in the European elections, Minister of the Interior Salvini is now quite openly flaunting the fiscal rules and demanding a debt-financed growth programme for Italy. This way he may kick the populist door in the Eurozone wide open and further weaken the principle of stability. This will of course also impact on investors’ behaviour, who could again turn their backs on countries such as Italy.
In Germany, by contrast, the governing coalition has been further weakened by the parties’ disappointing results in the European elections. The announcement by Social Democrat Party Leader Andrea Nahles that she was resigning from all offices impairs the government’s stability. In view of this, we can hardly assume that the German Federal government will be able to make a real mark, either in Germany or in Euroland, let alone on the global economic stage.
Against this global economic and political backdrop, the uncertainty in the financial markets is unlikely to lessen. The essentially rational response by investors would be low or negative yields on government bonds considered safe havens, rising yields on bonds with higher risk, and stock markets tending weak. For risk assets to get sold off we would presumably have to see more pronounced negative factors come into play. Investors can endure a lot as their pain threshold depends on the yields on safe investments and these are in most cases negative.