The economy has never looked better. The US is on the second longest expansion run on record. Unemployment is at an 18-year low at 3.8% and looks set to go even lower. How does the little red dot compare? Singapore’s GDP grew by 4.4% in Q1, driven by manufacturing, finance and wholesale trade. The Ministry of Trade and Industry narrowed its full year growth forecast from 1.5–3.5% to 2.5–3.5%. The last time this happened, we were recovering from the throes of the Global Financial Crisis in 2011, signalling that the MTI is confident in growth prospects for the rest of the year. Yet, markets have been sputtering ever since volatility spiked at the start of 2018 and sparked corrections in the DJIA and S&P 500, with the STI shedding 7% over the course of the first two weeks in February.
A customary look at the reason for the more or less synchronised growth across the world for much of the past decade reveals the reason: Cheap Money. Massive stimulus by the Federal Reserve and the ECB have been in effect since the crisis in 2009. This resulted in rock bottom interest rates and easy access to cheap credit, allowing companies and consumers to load up on debt, powering growth. US monetary policy affects Singapore as local rates follows the US closely, due to the fact that monetary policy here is focused on the exchange rate. Stock markets went on a bull run and reached record levels in January before coming to face with a markedly different environment in 2018.
In the US, the prospects of stronger inflation and an increasingly hawkish Fed which had been adjusting the federal funds rate up over the past two years caused sudden investor worry about an overheating economy. Coupled with a rising 10-Year Treasury yield, it seemed like the party was finally coming to an end. Shortly after the correction, yields breached the significant 3% level and hit a high of 3.12% in May, bringing back memories of the Taper Tantrum before sharply coming down, and has remained below 3% ever since. Yet, even as volatility gripped the market, record earnings were rolling out of corporate America, signalling that there was and is still some way to go before fears of a slowdown would be realised. Equities responded by behaving like a rudderless ship, moving whichever way the news of the day would steer it, trying to find a clear direction.
So, what gives?
Well, for one, protectionist rhetoric by Trump’s administration has been ratcheting trade tensions since it was announced that tariffs would be imposed on solar panels and washing machines from outside the US in January. This was followed swiftly by threats of steel and aluminium tariffs, suddenly allowing for some exemptions, then finally hitting the EU, Canada and Mexico. Not long after, possible tariffs of up to $150 billion worth of Chinese imports were announced as well. This led to a huge backlash and threats of counter-tariffs, spooking investors worldwide, raising the spectre of a trade war and exposing cracks in an otherwise concerted recovery.
Secondly, his political moves have been highly destabilising. Tensions remain high, and Trump’s increasing isolationist approach to trade came to a head with the G-7 meeting in June. Within hours of the testy gathering, he rescinded his approval for a carefully negotiated joint communique and labelled Canadian Prime Minister Justin Trudeau ‘weak and dishonest’, upending diplomacy efforts and sending the US’s relationships with its traditional allies as low as it’s ever been. All this, while calling for Russia to be included back into the G-7, and an only just concluded historic summit in Singapore with Kim Jong Un, the leader of the world’s most repressive regime. He’s not only emboldened Putin, but in the process, Trump has legitimized a leader long scorned for his human rights violations, aggressive missile tests, and nuclear ambitions. Kim Jong Un wins just by turning up, now seen an equal to a sitting US President, but Trump needs something more to show for all the drama the summit has provided thus far. It’s too early to tell if anything concrete will follow. No one knows what can of worms the summit has opened. One thing is for sure, Singapore has emerged the biggest winner of all.
Trump frequently brags that his unpredictable and sometimes unnerving style of negotiations is what makes him a master deal-maker. That may or may not be true, but Trump has already shown he is more than willing to dispense with traditions and practices, eschewing the White House Correspondents Dinner for two years in a row now, for instance. However, lest we forget, Wall Street craves stability and predictability. Diplomacy is fundamentally based upon mutual trust and respect. With the Trump administration, these key attributes have become naively ignored at best, actively undermined at worst. Markets don’t tend to react well to trade wars or actual wars.
At this point, the constant cycle and unrelenting bombardment of breaking news has made many numb to new developments. It has become the ‘New-Normal’. Yet, there is reason to be more wary than ever. Crumbling economies in emerging markets like Turkey, Venezuela and Brazil where local currencies have nosedived against the dollar have caused an exodus of investors. Emergency rate hikes have stabilised the drops for now, but with on-going political crises, the future is notably bleak.
The threat of a eurosceptic populist-coalition in Italy caused a spike in Italian yields in May and sent markets tumbling, only to see the shock ease and recover the very next day. The finance minister has affirmed Italy’s commitment to the euro, yet, possible elections down the road could allow populist parties to gain even more ground than they already have. Italy is a founding member of the Euro and an Italian exit from the Euro, as unthinkable as it seems, will likely bring the whole establishment down. Spain is not in a much better shape, with Mariano Rajoy ousted after a vote of no-confidence, giving rise to Socialist leader Pedro Sanchez. Markets do not like instability.
How does Singapore factor into all this? Its economy has and remains extremely open and export-oriented. A trade war will no doubt have a negative impact on its GDP, directly or indirectly. In fact, Singapore, famous for its overwhelmingly neutral and utilitarian stance on global affairs, recently expressed alarm during the Shangri-La dialogue. Defence Minister Ng Eng Hen noted that both the US and China are deviating from global norms, and that it would be a lose-lose scenario for the world if the US and China are unwilling to work together on an inclusive, rules-based system. The message was clear: No one will be spared from a trade war.
So it’s all bad?
To be fair, growth in the US remains robust, and the EU, although showing signs of a decelerating economy, is still moving along. The risks of contagion from emerging markets remain limited and the world is different than it was just before the crisis hit in 2008. However, record levels of debt weigh heavily on those who have gorged on cheap credit, risking default in an environment of rising rates especially those whose debts are dollar-denominated. Low current rates also significantly narrow the scope for effective monetary policy in the US should a recession hit within the next year or two. Different in a good or bad way remains to be seen.
Whatever the case, 2018 is a completely different beast than 2017, and keeping up with the year has been an exhausting affair. With so many factors in play, it bears reminding that we should expect the unexpected, and it pays to stay informed. Oh, and let us not forget, Special Counsel Robert Mueller has yet to complete his investigation of Russian interference in the US election. How will that turn out? Only time will tell. Or as I would say: You ask me, I ask who?