The Threats Multiply

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Whilst you were understandably busy with local developments, the world carried on spinning — increasingly out of control. Anyone who follows the global financial markets will be aware that they are almost all going down, but let’s spell this out briefly.

To start with, what has not gone down over the last several weeks? Primarily, the US dollar and the prices of many countries’ government bonds. That already hints at a tough situation, because these are “haven assets”, meaning they are what investors buy when they are selling riskier assets. Interestingly, precious metals have not benefited from their usual haven status, but have rather suffered price declines. Oil has fallen much harder — which is quite amazing, under the circumstances. Most other commodities have seen falls, with wheat being an exception.

But the key financial markets are bonds, which most people don’t follow, and shares, which they do. The prices of high-yield or junk bonds have been under pressure for weeks and even months in some markets and the spread between their yields and those of “investment grade” bonds, especially government bonds of higher-rated governments, has widened significantly. Indeed, the asset class which is most frequently the subject of warnings, whether from regulators, academics or private sector analysts, is corporate bonds — including in Israel, by the way.

But the share markets are more public and far more closely followed. Most people will therefore be aware of the ongoing price erosion, which in some countries has become a slide and even — in Portugal and Greece for example — a rout. The rot has gradually spread to encompass almost every bourse in the world, with China — typically — standing out by going in the opposite direction to everyone else. After being easily the worst performing major market in the first half of 2014, Shanghai has blasted higher recently.

There are, of course, specific reasons for specific outcomes, but the general trend is quite clear. Its primary, or proximate, cause is the surge in geopolitical risk — and by that, no-one means Gaza. The fact that the Israelis are thumping the Palestinians again, which how most of the financial world sees it, is of no great import. However, the crisis over Ukraine, the escalation of fighting there and the growing threat of direct Russian intervention — these developments are of massive import. The US sanctions against Russian persons and companies, the EU’s adoption of similar sanctions and now the Russians’ counter-sanctions — these have been profoundly depressing for Europe in particular and for the world in general.

There have been other factors at work, too. Although not a major item, Gaza is hardly irrelevant — and it is clearly negative. Worse, for the markets at least, has been the collapse of the Espirito Santo Group in Portugal, forcing the government to bail out one of that country’s largest banks, as well as several other specific developments elsewhere (yesterday, for example, Italy surprised the world by announcing that its economy had shrunk again in the second quarter, and not expanded, as had been expected). There is a reluctant realisation, based on a lengthening list of data, that the European economic recovery –such as it was — is over and that the periphery is on the verge of plunging back into crisis. One could add the new threat of the spread of the deadly and dreaded Ebola virus, and the potential panic that this could cause — indeed, that it is beginning to generate in West Africa, and that might easily spread elsewhere.

The common thread linking these developments in different spheres, in a wide spread of geographic locations — Ukraine, Portugal, West Africa, etc — is that they all directly impact the flow of global trade. The world is now intensely globalized, even more so than it was in 1914 at the end of the so-called ‘first era of globalization’. Consequently, factors that can disrupt trade are very dangerous to global prosperity. War and plague, two of the Four Horsemen of the Apocalypse, have historically been the most common disruptive factors and they retain that potential. But the fact that trade cannot proceed without finance and that the role of commercial banks is therefore critical, means that the continued vulnerability of the European and global banking systems is a perennial danger to the global economy, even in the absence of epidemics or conflicts.

In this context, special note should be taken of the decision two weeks ago by India to refuse to compromise in negotiations over a new global trade pact — and thereby effectively to scuttle a multilateral deal on which the World Trade Organisation and its member states had been working for years. This did not make headlines and most people are blithely unaware of it. But for literally billions of people around the world, it will probably have more (negative) consequences for their lives than Gaza, Ukraine and Ebola combined.