The established world order of globalisation and free trade is under immense pressure as US President Donald Trump continues to build a “Fortress US” behind a wall of higher tariffs, the long-term consequences of which are yet to be felt.
Already, some US sectors are feeling the pinch of rising tariffs, resulting in uncompetitive industries.
Layoffs have occurred in the electronics sector, among others.
Many countries have experienced higher domestic prices in reaction to rising tariffs, which is inflationary, leading to stricter monetary policies.
But the US has been in a potentially deflationary spiral for some time, as inflation remains subdued and economic growth robust.
But can it last, especially given that the bond market continues to price in lower economic growth, even a recession, in safe-haven trade?
How much more of these headwinds can emerging markets take?
Equity markets dropped sharply in May, with huge outflows recorded among emerging market funds, notably from China.
Higher tariff barriers are historically negative for exporters, and will affect China, the EU and Mexico.
The benchmark MSCI Emerging Markets is flat for the year so far, while the MSCI World Index has gained 10%, mainly on the back of a firmer Wall Street up to now.
As emerging markets continue to reel, the JSE has not been spared, with most gains since the beginning of the year wiped out in volatile trade.
Only resources are bucking the trend.
The SA economy’s tepid performance is even worse than that of other emerging market economies.
Brazil, Mexico and Turkey have all fallen into negative GDP territory.
It seems unlikely that Trump intends to replace the established world order with something completely new.
His actions are seemingly ad hoc, meaning that selected tariffs are hiked in order to correct perceived imbalances of the past.
Once these have been completed, trade could resume a settled path amid the new realities.
Equity markets have up to now been optimistic, with risk-on trade boosted at every turn where trade tensions have lessened.
This drove global equity markets to new heights in the first half of 2019.
But the tech spat with Huawei and the threat to Mexican car exporters have created new tensions, leading to question if it can be resolved at all.
It is a high-risk game.
Trump’s $16bn in subsidies to American farmers could prove to be inadequate or futile.
And lower economic growth in the US can become a reality after the first quarter’s unexpected strong showing.
The positive impact of tax cuts has probably played itself out.
Bond markets remain pessimistic, with yields on the US ten-year hitting an inverse two-year low of 2.1% in May in continued risk-off trade.
Optimism that the US Federal Reserve had matters firmly in hand, and was ahead of the curve, has faded.
The focus has shifted to Trump’s new preferred weapon to boost the US economy – lowering interest rates, with Fed chair Jerome Powell now ready to lower rates to negate the effects of a global trade war.
This remarkable turnaround will raise questions about the credibility of the Fed’s policy stances.
The bond market has been sceptical throughout, but equity markets have shown more faith in Powell’s strategy.
That may change.
With a US presidential election looming next year, Trump is unlikely to reduce the pressure on the Fed to cut rates.
Lower rates may bring the necessary fillip to the US economy, and lead to a rebound in equity markets.
But what if the US paints itself into a corner when even lower rates eventually lead to stalled growth as global trade reduces?
Global trade may be revived at that point, but the short-term environment remains tough for emerging markets and the like.
The pressure is on China to continue its stimulation policies.
It has been criticised for retaliating against the US with counter-measures in trade.
The EU has taken a more sober path of reason and dialogue.
But in the end the EU could also be hit hard with further trade tensions.
German bund yields are now at an all-time negative low.
The world is fraught with danger at the moment.
But it might just be that once the dust has settled, risk-on trade will be revived. Equity markets are hoping for that to happen.
Long-term scenarios still indicate ongoing resilience for emerging markets.
BlackRock, the world’s biggest asset manager, has reiterated its view that China is set to be the world’s largest economy in a decade, overtaking the US.
Even India is set to surpass the US a few decades later.
Trump’s actions may be the last throw of the dice to keep the US ahead of the race, which may not be successful over the longer term, as the limits of lower rates hit the wall.
Whatever the consequences, the US is sure to remain an important part of the world order, albeit not at the top.
The big prize remains a lessening in trade tensions and a resumption of globalised world trade without undue tensions.
So that risk-on can be resuscitated, with emerging markets benefitting.
Maarten Mittner is a freelance financial journalist and a markets expert.