The past few weeks have seen very wide swings in international stock and bond markets. Long-term interest rates have risen across the board, not only in the US but also in Europe and Japan. In particular, interest rates have undergone a correction in recent days, which has been felt globally.
Rising interest rates, as we have seen in recent weeks, are a sign of market dysfunction. Central banks have not – of course – intervened, but we can assume that it would not have taken much for them to do so openly.
Stock and Bonds Markets Have Been Volatile. Currency Markets Have Been Resilient.
The yen’s strength is not unusual in the face of capital market turbulence, as large Japanese investors are among the first to sell assets in such a risk-off environment in order to avoid risks to their own yen balance sheets. As a first step, this process has led to a rise in the yen of just over 10% this year, which has so far been in line with the euro, against which the yen has remained stable.
The other Asian currencies showed stability against the USD, rather than weakness as would have been expected in a “perfect storm”. In the past, the baht and ringgit have shown weakness during equity market sell-offs. What is probably unique about the current situation is that decades of correlations are breaking down. This is indicative of a fundamental change in the system; the political tensions we are seeing today are merely an expression of the change that is already taking place.
It is no secret that Asia has a growing, young and hardworking population that is enjoying prosperity and growing self-confidence based on these characteristics.
Asians no longer see themselves as inferior to the West. They are seeking greater autonomy and self-determination, both internally and politically.
Trump’s approach of imposing very high tariffs on all countries, including those in Asia, is probably just an attempt to slow down this development of independence and to integrate the much smaller economies into a network of relationships. In recent years, ASEAN has been trading more and more with each other and has also greatly expanded its trade relations with China, which now does more trade with Asian economies than with the US.
ASEAN integration is not an attractive development for the US either. As can be seen from Trump’s comments on the EU, any form of agreement that reduces US influence is an attack on the US. This is not even geostrategically wrong, but the way the Trump administration is going about it – all-out bulldozer attack – will provoke more resistance than interest in Asia.
To Protect Own Reputation
It is almost amusing how the US is trying to paint a picture of China being forced to seek a deal with the US. China shrugged off the imposition of 20% tariffs without comment. The increase to 34% was a slap in the face that Xi Jinping had to take in full, but he did not want to lose face (with his cadres and the people). The escalation to 145% tit-for-tat tariffs confirms this. The US can wait a long time for China to beg for negotiations, which will not happen – it will be interesting to see how the US deals with this. The other Asian countries, facing tariffs of up to 50%, are likely to feel the same way as China. Given their strong trade links with China, it is unlikely that Vietnam or Malaysia will turn their backs on China in order to be on good terms with the US. Again, this is about maintaining their own reputations with their own people, who in many Asian countries have large – and powerful – Chinese minorities.
