By Mike Dolan
LONDON (Reuters) – What matters in U.S. and global markets today
By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets
From one crunch to another, markets are finding it hard to catch a break as we go from tit-for-tat trade wars one day to U.S. government shutdown fears the next.
Today I’ll take a look at how all of the U.S. policy uncertainty and diplomatic upheavals have sparked a conversation in global investment circles about trust and transparency in U.S. governance and how eroding that could undermine the U.S. position as the world’s dominant investment destination.
Find this and more on today’s major market news below.
Today’s Market Minute
Can’t catch a break
This week’s U.S. metal tariff hikes and the instant retaliation from Europe and Canada are likely only the opening salvos in a global trade conflict that President Donald Trump appears intent on ratcheting up in less than three weeks’ time.
The rhetoric shows no sign of compromise.
“Whatever they charge us, we’re charging them,” Trump told reporters at the White House. “We will not stand idly by,” Canada’s Finance Minister Dominic LeBlanc said of the latest tariffs moves.
There is background tension in Europe too as Germany’s dramatic fiscal reforms and defence reboot now need to pass through parliament, with the Green Party’s necessary support still not secured.
The Bundestag lower house of parliament will on Thursday hold the first reading of the proposal, which electrified European markets last week. A vote is due next Tuesday.
Back stateside, the focus will be on the Senate. If it doesn’t support the Republican-backed stopgap funding bill, a partial government shutdown could be triggered as soon as this weekend.
The whole picture means U.S. stock futures have reversed all of Wednesday’s modest bounce in the S&P500. And stock benchmarks across Europe and Asia are also in the red.
Meanwhile, Treasury yields pushed higher, batting away better-than-forecast consumer price inflation numbers on Wednesday, as the tentative stock market stabilisation reduced Federal Reserve easing bets once again. The dollar index was also off slightly.
CPI numbers are now very much in the rear-view mirror for a Fed waiting to see the impact of tariff hikes, so today’s producer price numbers should also have little market impact.
But what could have quite a bit of market impact over the long term is the growing sense that the tumult in Washington could threaten the U.S. position as the world’s safe haven.
Exorbitant disruption risks undermining US ‘privilege’
There’s something more than U.S. tariffs and recession risks gnawing at financial markets. There’s the growing sense that the chaotic policy disruption in Washington is eroding the world’s trust in U.S. institutions and its assets.
Broken political alliances and economic wars with major trade partners are having many effects – not least heightened business uncertainty over what will happen next – but one of the most notable is the brewing investor concern that America could lose a chunk of its “exorbitant privilege”.
This term, first coined in the 1960s by then French finance minister Valéry Giscard d’Estaing, essentially refers to the benefits the U.S. gains from the outsize demand the world has for U.S. assets as a safe haven. The privilege hinges variously on the extensive use of the dollar internationally, the U.S. rule of law and institutional rigor as well as the projection of its soft power.
The list is much longer than that, but you get the picture. The sheer size, depth and transparency of U.S. markets, in combination with the reliability and openness of its governance, have – for decades – given the U.S. a disproportionate slice of world capital and the cheaper financing that goes with that.
Could Donald Trump’s avowedly disruptive administration call all that into question and whittle this advantage away?
Financing metrics, such as long-term U.S. borrowing costs, don’t yet suggest that a major fracture is afoot.
But U.S. equity prices have started to correct over the past month, even as the dollar has weakened – an ominous combination.
Ultimately, though, the very fact that trust – or the lack thereof – is part of the U.S. conversation at all is the most remarkable thing.
On Wednesday, JPMorgan’s chief global economist Bruce Kasman spoke openly about the challenges during a roadshow in Singapore. He opined about how the U.S. secured its “exorbitant privilege”, citing many of the reasons noted above and including things like the “integrity of information flow”.
The administration’s cutbacks to government agencies and moves to disband the advisory committees assisting with data collection are also potentially jarring, he said.
“All of those things are part of the uncertainties that have moved into U.S. policy, and that part of the risk in the outlook this year I don’t think has been appreciated.”
‘Exorbitant burden’?
Referring to exorbitant privilege, Kasman added: “The risk that stuff starts to come under pressure and becomes a structural issue in the markets is not something I would, by any means, underplay.”
This is likely what investors and strategists both within the United States and around the world have been thinking for weeks – even if relatively few have verbalized it.
And Kasman is not alone in saying something.
Writing about speculation surrounding the prospect of a “Mar-a-Lago Accord” to correct U.S. deficits and global imbalances, former Reserve Bank of India governor Raghuram Rajan questioned the diagnosis of Trump adviser Stephen Miran and said it was dangerous for America to play around with its exorbitant privilege.
Rajan expressed doubt that reforming U.S. macroeconomic policy would somehow deter overseas savers from the U.S., thereby weakening an overvalued dollar or helping to cut U.S. deficits.
“It is not clear where the Trump administration’s current path of ‘shock and awe’ is supposed to lead,” the former International Monetary Fund chief economist wrote in Project Syndicate this week.
“The claim that the dollar’s attractiveness is an exorbitant burden rather than an exorbitant privilege is unpersuasive, especially when those making such arguments are so reluctant to give up the burden,” he said, referring to the administration’s regular support for the dollar’s global status while promoting policies that undermine it.
“Markets are unnerved by the punishment that the administration, convinced that the U.S. is a victim, is willing to inflict on close allies,” he concluded. “If such behavior reduces the attractiveness of the dollar, perhaps it really will become an exorbitant burden. But that is not a future that any American should want.”
It’s good to remember that foreign holdings of U.S. financial assets nearly doubled over the past decade to some $60 trillion before the recent market ructions.
Given the scale of this cross-border money, if faith in the U.S. truly is shaken, the outcome could make the year’s market shakeout to date seem very small indeed.
Chart of the day
Stock markets have voted clearly over the past month on the brewing trade wars and lack of policy visibility in the U.S., as they’ve repeatedly hit the “sell” button. Regular voters now seem to be following suit. A Reuters/Ipsos poll found 57% of Americans think Trump is being too erratic in his efforts to shake up the U.S. economy, and 70% expect that tariffs will make goods more expensive.
Today’s events to watch
* U.S. February producer price report, weekly jobless claims
* Federal Reserve reports on financial health of U.S. households in its Flow of Funds update for 4Q2024
* Bank of France Governor Francois Villeroy de Galhau and Bundesbank President Joachim Nagel speak together in Paris
* Germany’s Bundestag holds first reading of budget reform proposal
* U.S. Treasury sells $22 billion of 30-year bonds
* U.S. corporate earnings: Dollar General, Ulta Beauty
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Mike Dolan; Editing by Lisa Shumaker)
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