Birth of Tragedy in Global Markets

Khalid Hussain
Pakistan has seen the adversarial interaction between civilian governments and the military forces. We have seen by how the two sides of the Pakistani realpolitik have periodically wavered between emotional decision making and considered analysis.
Both sides have periodically been emotional as well as rational. However, their obvious animosity is so fraught with conflict it brings to mind Friedrich Nietzsche’s “The Birth of Tragedy” wherein the German philosopher studies Greek tragedy by studying tensions obtaining between Apollo, the god of rational thinking, and Dionysus, the god of instinct and emotion. Pakistan suffers a worse fate for not only that these opposing forces battle for control of the narrative but also because in our political divide, the two sides change positions arbitrarily.
The Tariff Man Trump in White House is about to shut down the American government if his wall on the border with Mexico is not allocated budget for construction. He is used to create his own political tragedy with a trade policy that has already seen the US sliding closer into recession.
No “great deal” is in sight. This is evident in President Xi Jinping humbly insisting China will never assert hegemony. There is also scant chance of the Federal Reserve calling a temporary halt on its hiking path. It has been pushing on, as some commentator’s have noted, as if bent upon undoing the work of three Fed chairs. Markets are fickle and oblivious to the fundamentals being driven by sentiment. The Dionysian looks set to remain ascendant raising risk premiums, halting expansion and slaying the bull market.
Markets are not yet convinced which way to go. However, analysts say equity markets are more likely to rise than fall over the next six months. Economic data is a more reliable indicator of trends than news headlines as a good strategy to navigate the market in the medium run. The Fed has assessed the risk of a recession is only about 20% in the next 12 months which means inflation will remain in check. This is what keeps global equities trading well on a trailing price.
The negative reaction to the “Tariff Man” President and arrest of Huawei’s CFO reveal how jittery the markets remain to escalating US-China trade spats. Three key battlegrounds are important for markets today and the serious struggle they face between the rational and the emotional forces in global high politics.
The American Fed has been hiking rates upwards but oil prices have since fallen, credit spreads have widened, market volatility has increased, and politics have really complicated the economic outlook. The US Fed Chair Jerome Powell has likened the current situation to walking into your living room when the lights suddenly go out. “What do you do? You slow down…”
Cold electoral logic usually dictates a shift of focus away from lofty strategic goals and toward immediate economic concerns in the United States. Campaigning for the next election will soon start. No one knows is better than the “Tarriff Man” president knows if the US economy goes into a recession before the next election, his career is likely finished. He simply cannot stay oblivious to the impact of his China policy on the markets.
But no one can blame the markets when a pledge for a “very positive change, on trade and far beyond, between our two great nations” is followed a day later with a CFO in handcuffs. Rationality, therefore, cannot be guaranteed in these negotiations. And it’s not just in the US that emotions are heating up politics. French President Emmanuel Macron reacted to the heated “yellow-vest” protests in Paris by raising subsidies and cutting taxes, while UK Prime Minister Theresa May has faced acrimonious parliamentary debate and a no-confidence vote over Brexit.
The battle between Apollo and Dionysus is not going to be over any time soon as leaders know around the world. America has overweight positions on global equities and emerging market sovereign debts. Escalation between the US and China remain a threat for markets as is the likelihood of an aggressive Fed. Yet one cannot see a recession in 2019 as likely although monetary policy now plays a far more important part around the world as we near the next recession in the United States of America.