London Pre-Open: Stocks to Slide on Trump Tariffs Announcement

Context of global economy

State of Indian economy

Survey’s recommendations

Change in Survey mood

Source: indianexpress.com

While the financial situation of the federal government is often scrutinised, not often do one take a look at the Malaysian state’s fiscal health. After all, most of what is deemed as “public service” in this country is provided by the federal government, not the states.

However, looking at the financial statements of all 13 states that make up Malaysia, one could see that the strength of a state’s economy does not necessarily translate into a rich government.

As state government revenues are often associated, or tied to, their control of land and natural resources, such as water, sand, timber, tin, gold, rare earth minerals, crude oil and natural gas, small states are often “penalised” compared to larger, more naturally well-endowed states.

This is even if the state’s economy measured by its gross domestic product and trade performance could be among the biggest in Malaysia.

This raises the question of whether state governments should be allowed to collect more revenues from their own people, rather than just depending on revenues that are tied to land matters and property assessments.

As can be seen with the case of Sarawak, whose revenues shot up in 2020 when it received the green light to collect sales tax on petroleum products, the other states should perhaps be allowed to collect some form of indirect tax that better reflects their economic wealth.

However, the capability of the states to collect indirect taxes, as well as what they will do with the additional funds, would also be in question.

Read the second cover story above and more in The Edge Malaysia this week.

Source: Theedgemarkets

US President Donald Trump said he would prefer not to have to impose tariffs on China, while at the same time highlighting the influence he sees his threats having over the Asian nation’s actions.

“We have one very big power over China, and that’s tariffs, and they don’t want them,” the US leader told Fox News host Sean Hannity in an interview that aired in the US. “And I would rather not have to use it. But it’s a tremendous power over China.”

Trump has wielded tariffs as a frequent threat against friends and adversaries, and for the US promised additional revenue from them would help fund his domestic priorities. Trump threatened on his second day in office to put 10% tariffs on China as soon as Feb 1 for allowing fentanyl to “pour” into America.

Trump’s latest comments came in a wide-ranging conversation that also touched on other immediate global challenges he faces in his first week in office. The US president threatened to impose “massive” additional financial penalties on Russia if it doesn’t get to the negotiating table to end its war in Ukraine, called Iran’s leadership “religious zealots”, and said he also plans to reach out to North Korean leader Kim Jong Un.

Markets have taken it as a positive sign that Trump stopped short of imposing the tariffs on China in his first days in office, and his recent threats were softer than those issued last year. On the campaign trail, the Republican floated additional levies on China around the 60% mark, which economists have said could decimate US trade with a Chinese economy heavily reliant on exports.

Trump also reiterated his admiration for China and its leader Xi Jinping during the interview, saying he is “like my friend”, and that a recent call with him “went fine”. “It was a good, friendly conversation,” Trump said.

“I had a great relationship with him prior to Covid,” he added. “They are a very ambitious country. He’s a very ambitious man.”

‘Smart guy’

Trump also had praise for Kim, saying the North Korean leader “happens to be a smart guy” and isn’t a “religious zealot” like the leaders of Iran. Trump said he plans to reach out to Kim again.

While Kim hasn’t directly name-checked Trump since his election victory, state media earlier carried comments from the North Korean leader saying past talks with the US during Trump’s first term had only served to confirm Washington’s “unchangeable” hostility towards North Korea.

Trump had harsher words for Russia’s Vladimir Putin, threatening “massive” tariffs and big new sanctions if he doesn’t settle the war. “I don’t want to do that, but we have got to get this war ended,” Trump said.

Trump also criticised Ukraine President Volodymyr Zelenskiy’s handling of the initial stages of the conflict, saying he’s “no angel”.

Source: Theedgemarkets

Today’s world is increasingly grappling with a mentality reminiscent of the Cold War and even that predating the two World Wars. The recent attempt to impose martial law in South Korea, one of the most advanced democracies and economies in Northeast Asia, exemplifies this mentality.

Is it class or geopolitics?

Commentators often point to economic and social factors to shed light on this phenomenon. For example, many believe that the increase in radical sentiments in eastern Germany is largely due to limited job opportunities, lower wages and a decline in the quality of social services compared to western Germany. Furthermore, residents in western Germany have had more exposure to multicultural environments. In contrast, this socioeconomic divide has caused many in the east of the country to gravitate toward the anti-immigration rhetoric espoused by extremist groups.

In the United States, it is often explained that Donald Trump and his supporters have taken control of the Republican Party due to the frustrations of disenfranchised and disaffected white males, as well as those without a college education. These groups have experienced diminishing social mobility and falling incomes. Similarly, rising inequality and the declining fortunes of the working class fuel the growing influence of Bernie Sanders-style leftism within the Democratic Party. The November elections further intensified awareness of the educational gap, which is increasingly perceived as a social and class divide marked by cultural, gender and even culinary differences.

Similarly, recent election outcomes in the United Kingdom, France and other democracies are rationalized by a shifting political landscape driven by economic discontent.

Another significant factor in the current climate is the increasingly hostile global geopolitical landscape, which resembles the pre-war situation of the 1930s. As the world becomes increasingly polarized into conflicting camps, domestic politics mirrors these global tensions. Radical far-right and far-left movements are gaining traction in countries that are major powers, putting centrists on the defensive.

In France today, much like in the 1930s, the left and the center have united to prevent the far right from coming to power. Similarly, in several federal lands of Germany, the left and center are coalescing to build a wall against the rise of the far-right parties. The upcoming federal elections are likely to reflect this trend. Reports of connections between radical parties and geopolitical rivals, such as Russia, echo past ideological battles, and the ongoing war in Ukraine underscores historical parallels in our geopolitically divided world.

Or is it irrationality?

Scientific evidence indicates that the world is on the brink of environmental collapse, with global warming evidenced by severe floods, scorching heat and extreme weather patterns. Global action is urgently needed but is sorely lacking. Even as environmental crises escalate, the green parties remain on the fringes of political influence in most countries.

Green policies are inherently neither right nor left. They often clash with center-right perspectives because they prioritize environmental outcomes over economic efficiency. Due to its nature, the green ideology is in perennial conflict with major industries like oil and mining. Green policies should not align with center-left ideologies either, as they may threaten jobs and worker welfare in existing industries. Retraining programs for displaced workers often fall short, compelling many who face structural changes to seek employment in lower-paying, less “respectable” jobs.

Given the magnitude of the global environmental crisis, it is only rational that green parties should have the potential to rally voters around collective action to save our planet. However, national agendas prioritizing identity – be it class, national, religious or gender-based – continue to overshadow environmental concerns at the political forefront. To put it mildly, irrationality empowered by the radicalizing bullhorns of social platforms dominates the political agenda over the rationality of environmental action, which, some will argue, is simply too complex for a TikTok reel or a tweet.

The final resurgence of a bygone era

Class, geopolitical and religious discourses powerfully dominate domestic and global politics today. This realm of geopolitical competition and identity division has its roots in the rationality of an era predating the World Wars. It has resurfaced with renewed vigor and serves as a backdrop for contemporary politics. Today’s ruling class primarily consists of the generation molded by the conflicts of the past, who shape the world in their image.

The worldview of these political elites was formed during the Cold War when the world was divided into “us” and “them.” Conflict was commonplace, there were two genders, religion or ideology served as the source of truth, class was the main form of identification and patriotism was seen as a call to duty.

For this reason, current world leaders have strongholds among this generation and their younger followers. The ruling class comprises leaders and the entire generation that has amassed the greatest wealth and power during the peaceful era since World War II. The electorates of these leaders increasingly reflect these established worldviews, seeking comfort in a nostalgic return to the societal norms of their youth. It is paradoxical yet somewhat rational that the younger followers, who have never experienced that past society, view it as a reference for a better future.

The past three decades have marked significant changes that this older generation has not fully internalized or accepted. Skepticism toward the U.S. remains a common sentiment among older generations in the former communist bloc, who attribute many life challenges to what they perceive as decaying U.S. capitalist culture. While explicit critiques of capitalism may have diminished over time, grievances associated with “decaying U.S. culture” resonate strongly with them and are experiencing a resurgence in popularity.

Conversely, attributing the blame to “liberals in big cities and leftists on university campuses” who allegedly conspire with “communists” and various radicals abroad for most problems, both real and imagined, may resonate well with older voters across much of the West. The rationalization for the attempted martial law in South Korea is a surprising yet telling example.

Similarly, colonialism, which is allegedly still perpetrated by wealthier nations, serves as an easy explanation for many social ills in the developing world in the eyes of the older generation.

Echoes of past wars and ideological conflicts quickly revive latent distrust. Old habits run deeper than new realities, and trigger words such as “the U.S. imperialists,” “communists” and “colonizers” still have a potent impact on this generation.

Source: GIS

JPMorgan issued delivery notices for 1.485 million ounces of gold to meet physical delivery for the February gold 100-ounce contract, with deliveries on Monday, Feb 3. That accounted for roughly half the total to be delivered, with Deutsche Bank AG, Morgan Stanley and Goldman Sachs Group Inc making up the bulk of the rest.

Deutsche Bank, Morgan Stanley and Goldman declined to comment.

Source: Theedgemarkets

Market exuberance about the US growth outlook has pushed up interest rates and the US dollar, as has the stance of US fiscal policy. But can high interest rates and a seemingly overvalued exchange rate be compatible with ‘US exceptionalism’?

If one ever needed confirmation that financial markets price things primarily based on beliefs about the future, this week gave it. Once it became clear that, no, President Trump was not going to enact sweeping tariffs by executive order on Day 1, the ‘Trump trade’ and ‘American exceptionalism’ drivers of pricing reversed somewhat. The US dollar depreciated, bond yields declined and US share prices slipped. The Australian dollar bounced about three-quarters of a cent against the US dollar in the space of a few hours. These moves did not entirely undo the shifts seen since the US election, but they highlighted just how overbought the Trump trade was. People trade the belief, and then reverse course when reality turns out differently. (And then reverse course again on some actual announcements, but that’s another story.)

The deeper question of the future path of US interest rates remains.

Contrary to last year’s recession worries, US economic growth remains well above past assessments of trend. Unemployment remains low and employment growth robust. Inflation has declined but remains sticky above the Federal Reserve’s 2% target. Compared with other major advanced economies, the United States has been remarkably resilient to tight monetary policy. The US economy has powered along almost as if the fed funds rate had not been so high.

This resilience has been a bit of a puzzle. Low fixed-rate mortgages have long been a factor there, so they cannot fully explain this divergence. Macroeconomic statistics being what they are, one can never completely rule out ‘it was all a mirage and will be revised away eventually’ as an explanation. Stronger balance sheets in the wake of the policy support during the pandemic may be contributing. Also relevant, though, is the role of fiscal policy working in the opposite direction to monetary policy. This is a theme we have highlighted previously.

Conventional macro analysis tells you that it’s the change in the fiscal deficit – sometimes called the ‘fiscal impulse’ – that contributes to economic growth. That said, the level of the deficit surely matters for the level of output, and thus any assessment of how demand and supply compare. And at more than 5% of GDP, the US federal deficit is helping to supercharge demand in an already fully employed US economy. By contrast, because burgeoning public spending in Australia is being more or less matched by rising taxation, the boost to the level of overall demand is smaller.

At this scale, differences in fiscal stance can influence the paths of monetary policy interest rates. In broad terms, the narrative for the last couple of years has been that central banks needed to set monetary policy to be restrictive to get inflation back down to target. Once they were reasonably sure that the disinflation was on track, central banks would start cutting interest rates back towards neutral, wherever that was. Because monetary policy works with a lag, this process needs to start before inflation has returned all the way back to target.

The idea that monetary policy needs to become less restrictive as inflation approaches target remains intact. Less clear, though, is whether interest rates need to converge to ‘neutral’ (r* in the economics jargon) in the short term, or to some other rate.

Where policy rates end up troughing in different economies over the next year or so therefore rests on the answer to two questions.

First, how does the (long-run) neutral rate relate to the central bank’s estimates of it?

It has long been our house view that, wherever neutral is, it is higher than it used to be. The Federal Reserve and other central banks have seen the same developments and revised up their estimates of neutral over the past year or so. Based on the ‘dot plot’ of FOMC members’ views on the ‘long-run’ level of rates, the Fed’s estimates of neutral are centred on 3% or a touch below. This is still a little below our own view that this longer-run concept of neutral is likely to be somewhere in the low to mid 3s.

Depending on how quickly central banks pivot their thinking, it is therefore possible that some central banks will need to backtrack as they discover that the neutral rate they were aiming for is actually higher than they thought. This evolution, and the likely policy actions of the Trump administration, underpin our current forecast that the Fed will start raising rates again in 2026. Policymakers never forecast that they will end up backtracking, so the ‘dot plot’ shows a smoother convergence without a turning point. But it’s also plausible that the smoother path implied by the ‘dot plot’ occurs because policymakers revise up their estimate of neutral further.

(We don’t think the RBA is subject to the same risk of upward revision to their estimates of neutral in the near term. Their models already imply that the neutral nominal cash rate is in the mid 3s, and the recently adopted checklist approach to assessing broader monetary conditions will reduce the risk that statistical inertia in those models leads to underestimates of neutral.)

Second, is long-run ‘neutral’ where monetary policy needs to converge to, or is there something (like fiscal policy) that monetary policy will end up needing to lean against to keep inflation at target?

One could argue that this is making a distinction without a difference: those forces are just the things that cause ‘true r*’ to move around. The issue is that the standard models used by central banks to estimate the neutral rate do not include the impetus from fiscal policy or other factors over which monetary policy has no direct influence. The researchers in this field acknowledge that persistent changes in fiscal policy could affect the level of neutral. But because their models omit any fiscal variables, they cannot quantify the effect.

Despite these shortcomings in the models, FOMC members clearly recognise the issue. The ‘dot plot’ shows that they do not expect the fed funds rate to reach ‘neutral’ until after 2027. So even if their view on neutral is still too low, their recognition that other factors lean against a swift return to neutral will help counterbalance this.

Because other major economies have different fiscal (and growth) outlooks, the shifting market view on US rates has implied shifts in views on interest rate differentials, and so exchange rates. But this puts the US dollar even further above levels at which purchasing powers are at parity, an anchor point that exchange rates tend to gravitate towards over a run of years. Most published measures of the real effective US dollar exchange rate show it at levels surpassed only by the mid-1980s era that ended in the Plaza Accord.

Higher interest rates and a seemingly overvalued exchange rate. One can’t help thinking that reality will bite the US exceptionalism narrative sooner or later.

Source: ACTIONFOREX