Four Flashpoints of Volatility


by Jim Rickards, Daily Reckoning:

1 – Trade Wars Flashpoints, From China to Canada and Mexico
Wall Street has knee-jerk reactions to any trade war related headlines.

There are legitimate reasons to be concerned about trade wars. The world is increasingly more connected than ever. Many major American companies that are household names such as Starbucks (SBUX), Boeing (BA) and Apple (AAPL) rely on their exports (and imports) from China for a sizable portion of their overall sales and profits.

If China continues to retaliate against trade war policies from the U.S. with harsh measures of their own, it could hurt revenues of those firms.

But, here’s the latest revelation:

China wants to keep more of what it makes — in China — across a variety of sectors. Trade wars elevate the Chinese government’s desire to do that. The country has just recently launched a new $1.6 billion initiative called “Made in China 2025.”

The strategy entails an increase in research and development spending. That would cause Chinese companies to rely less on international technology and equipment. The more China buys internally, the less it will buy American products or need to export to the U.S.

What all of that could mean is that similar products in the U.S will become more expensive for consumers. That would hit directly at stock of those companies, making them more volatile.

While headlines from the White House continue to target China, our regional trading partners are undoubtedly some of the most important, and currently some of the most fragile.

To the north, Canada is playing up its optimism over NAFTA talks. Rhetoric is one thing, reality is another. It’s important to look at what institutions are doing, not what they’re saying.

Canada is currently enhancing its participation in several other trade agreements, including an updated Trans-Pacific Partnership that does not include the U.S. In the wake of Brexit, Canada has also made important trade links to both Europe and the U.K.

That means it could shift its trade focus away from the U.S., while purchasing fewer American goods. All of that could hurt manufacturers in both countries and increase volatility into the share prices of companies involved.

Southward, Mexico is taking the risks of NAFTA talks going wrong seriously. The threat of failed NAFTA negotiations is considered the greatest threat to the Mexico Peso in 2018, according to a survey conducted by Bloomberg of 100 foreign exchange professionals gathered for a recent event in Mexico City.

If financial anxiety builds, a trade war could ignite a currency war. That would cause central banks to protect or position their currencies in order to fight a trade war, inflicting a pattern that elevates volatility on the markets. Expect trade war headlines and related action to pump up and tear down the markets on any given day.

2 – Geopolitical Flashpoints
The U.S. could attack Syria any minute now in response to its alleged chemical attack against civilians last weekend. Russia has warned Washington that it would face “grave consequences” if Russian military personnel in Syria are harmed in any attack.

Needless to say, any armed conflict between two nuclear powers carries great potential risk. One single incident could trigger an escalating spiral. But it’s not just Syria.

Since President Trump took Washington by storm, the elephant in the room has been the nuclear threat on the Korean Peninsula. When North Korean leader Kim Jong-un took a heavily guarded train to Beijing for what Western media dubbed a “surprise visit,” the markets went into a rally, and then a correction.

The rally was based on the notion that the visit would forge a truce in favor of the U.S. and cause both parties to back down from aggressive saber-rattling.

The tailspin was based on the interpretation that it meant Kim Jong-Un was cozier with China than President Trump believed. Concerns built that this could cause more trade and other agreements between the two nations, excluding the U.S. even further.

Now that President Trump has John Bolton as his National Security Advisor, the geopolitical flashpoint has increased even further. On Feb. 28, Bolton published an op-ed in the Wall Street Journal supporting a pre-emptive nuclear strike against North Korea.

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