Morning Commentary: Have We Reached Peak Globalism?

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Have We Reached Peak Globalism?  Share this story: Andrew Kositkun Foreign Exchange Head Trader

At many points over the past few years, the global system of trade has been under scrutiny. While there has been a trend toward de-globalization, the reality is much more complicated, with both decoupling and recoupling developments. Below are some of the more notable examples of recoupling and decoupling. Recoupling   Last summer, the United States–Mexico–Canada Agreement (USMCA) deal had yet to be completed, and President Trump threatened to levy up to 25% tariffs on all imports from Mexico unless the country changed its border controls as well as other tariff actions against Canada. Since then, the USMCA deal has been fully implemented, and the U.S.–Canada–Mexico relationship should be stable going forward. In January 2017, the U.S. pulled out of the Trans-Pacific Partnership, but other countries did sign a modified version of the agreement in January 2018. Additionally, this past weekend saw China, Japan, Korea, Australia, New Zealand and the Association of Southeast Asian Nations countries all sign the Regional Comprehensive Economic Partnership (RCEP). The RCEP is now the world’s largest free-trade agreement, covering nearly 30% of global GDP, global trade and the global population. Decoupling The U.K.’s exit from the European Union (EU) remains on track, albeit with a devastating impact on the U.K. economy. It is estimated that U.K. GDP will contract 11.3% this year compared with a 7% drop for continental Europe and a 3.6% contraction in the U.S. More importantly, the tech war between the U.S. and China continues to grow. This tech war is particularly dangerous for the following reasons. The first is that it’s being driven by economic and geopolitical considerations. The second is that potential actions are much more disruptive. Tariffs can be better accommodated as a cost of doing business. However, outright bans can mean an abrupt halt to business. The incoming Biden administration has signaled a coordinated approach to China. Time will tell if this approach can generate a more benign outcome. What the last couple of years has taught us is that there is a cost to forced decoupling. Specifically, there is a big difference between decoupling by trade protectionism and the natural process of companies diversifying supply chains or taking advantage of new technology. The U.K. serves as an example to the rest of Europe that the biggest loser in a divorce is the party who is leaving the group. In the U.S., recent experiences show that protectionism, whether implemented or threatened, hits growth with little to show in terms of reducing trade imbalances. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: Markets are trading with a risk-off tone, as investors continue to weigh negative virus headlines on rising infections, tougher restrictions and vaccine progress. Global equities are mostly in the red today, with yields also falling as New York City announced that public schools will move back to remote learning. In Japan, record levels of infections have led officials to raise the country’s virus alert level to “maximum alert.” U.S. initial jobless claims rose to 742,000 filings last week from a revised 711,000 print. This marks the first jobless claims increase in five weeks. Conversely, continuing claims continue to fall, with the data series dropping to 6.4 million from a revised 6.8 million print. EU leaders are meeting virtually today. Officially the call is to discuss the COVID-19 response but has evolved into another Brexit touch point. The pound has rallied over recent sessions on reports of progress toward a deal; however, time to strike a deal is running out, with the end-of-December deadline fast approaching and talks temporarily suspended due to a negotiator testing positive for COVID-19. To the extent that a skinny deal avoids the worst-case no-deal scenario, a rally in the pound is understandable. Nevertheless, a skinny deal will still incur an economic cost relative to the status quo. For example, the U.K. will, despite a deal, have less favorable trading terms with its largest trading partner. Because of this, the initial relief rally pop on a deal is likely to give way to pound selling as markets refocus on the worsening economic picture in the U.K. and implications of a skinny deal. Australian jobs data soundly beat expectations, as the economy added 178,800 jobs versus expectations for a 27,500 jobs decline. The jobs mix was also good, with 97,000 of the jobs added being full-time positions. While the unemployment rate rose to 7%, it still beat expectations for an increase to 7.1% despite a sharp rise in the labor force participation rate reflecting the reopening of regional Victoria. Overall this was a solid jobs number and should keep the Reserve Bank of Australia on for now after easing earlier this month. Turkey’s central bank raised rates by 4.75% to 15% at its latest policy meeting. New central bank governor Naci Ağbal is attempting to restore predictability to monetary policy. While President Recep Tayyip Erdoğan has pledged support for his economic team, he also renewed warnings of the burden high rates place on the economy.

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