By Michael Every of Rabobank

When you assume, you make…

Today, the press seems to be waking up to the multiple schisms that simultaneously threatening global markets. Perhaps because they are starting to get involved directly. Yet many in markets still try to assume this is all just BAU.

US President Trump gave a speech last night in which he promised to sharply scale back the US economic relationship with China if re-elected: firms would be punished if they send jobs offshore and rewarded if they bring them back; the US will become a manufacturing giant again; and China will not be allowed to continue to grow its military with indirect help from the US. Yet is any of this a surprise? It was in a recent list of election pledges – perhaps the press didn’t read them? Of course, one can argue that this was also promised in Trump’s first term, which is true; but does that guarantee that it won’t be pursued far more aggressively in a hypothetical second given the current global backdrop? That’s a fat tail risk to assume away.

China is to refuse to extend visas for all journalists working for US organisations unless the US halts it plan to impose new restrictions on the much higher number of Chinese journalists working in the States: that even includes the Wall Street Journal and “rock no boats” Bloomberg; that is as two Australian journalists were rapidly extracted from China for their own safety, according to the FT, following late-night visits from the police. Consider the world’s two largest economies with nobody, even third parties, on the ground doing any reporting for the other.

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The US had already announced that it was pressing ahead with its so-called hi-tech ‘Clean Network’ to its ensure data security from any potential Chinese threats. China has now stated that it will build its own network for itself and like-minded countries in the face of exactly the same threats (from the US?) The new ‘China Network’ was launched yesterday, which looks another huge signpost towards bifurcation of the tech space, as presumably one will not be able to be on both networks simultaneously.

On the China-India border, New Delhi says its troops crossed the Line of Actual Control (LAC) in order to thwart what it says was a looming Chinese incursion, and that warning shots were fired. (Previous casualties were all caused by melee weapons, and guns have absent for decades to reduce tensions.) The Chinese response, from the Global Times, was:

“We must warn India seriously: You have crossed the line! Your frontline troops have crossed the line! Your nationalist public opinion has crossed the line! Your policy toward China has crossed the line! You are over-confidently provoking the PLA and Chinese people – this is like doing a handstand on the edge of a cliff!

Nationalist forces in India should think twice that if the Chinese and Indian armies change their agreement of handling friction along the border area to prioritize the use of gun, then what use of them seizing two commanding heights on the south bank of Pangong Tso Lake? Does commanding height make sense in modern military conflict? Between Indian and China, which country has more weaponry and which country has bigger military budget, can’t Indians count out?

China doesn’t want a border war with India. But if the Indian side misinterprets China’s goodwill and intends to deter the PLA with warning shots, its moves will backfire. China will never concede for the sake of avoiding a war. If India’s frontline troops continue to fire shots recklessly, they must be prepared for the consequences of breaking the rule in the first place – they could be eliminated immediately in case of military conflicts.”

Meanwhile, right next to the EU, Bloomberg notes that “Turkey’s Muscle Flexing in the Med Isn’t Just About Gas” and quotes an expert in Turkish affairs based and national security based at the Naval Postgraduate School in California stating: “Not far below the surface is a much more emotive set of issues, the idea Turkey is the greatest power in the Eastern Mediterranean and should be treated as such. It perceives itself as surrounded by rivals and adversaries and it will use strength to assert itself, because it can.” The article notes Turkey continues to rapidly build up its naval strength: a light aircraft carrier will be launched next year, for example. President Erdogan is certainly not backing down from his rhetorical clash with Greece – and France, who backs it, is now basing its fighter jets in Cyprus. Risks of intra-NATO fighting remain low (hopefully). Yet even preparations are extremely costly for a struggling economy – and for a struggling currency, with TRY nearly 7.46 this morning.

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Meanwhile, the UK continues to sail into what may be its own storm, or a storm in a teacup. The pro-Brexit Telegraph reports PM Johnson is to tell the EU the Withdrawal Agreement (WA) he signed “never made sense and must be rewritten”, which is explosive. The pro-EU Guardian reports internal EU warnings that: BoJo is holding back on a compromise until the last moment to achieve a “trade off”; Home Secretary Patel may try to end-run the EU by dealing with its five largest members in a meeting on 22 September; the British really do want 80% of their fish; and Downing Street are behind the kind of anti-EU stories we see in the Telegraph today.

So betrayal, or a very tough negotiating stance? Either way, it escalates the risks of No Deal. Lawyers state the dispute over the WA could end up at the European Court of Justice –the UK not wishing to recognise as having any power over it is all part of this issue– which could impose fines (which presumably the UK would not pay), suspend the WA (which the UK is already doing in a way), or start trade wars/raise tariffs (which seems to be where this would head in a worst-case anyway). Ultimately, we have to know what BoJo really wants before we know where GBP will go.

Just as we have to know the same in terms of the US, China, and India before we know where their currencies will go.

Assume you know what they want, and assume that the outcomes will be good in all cases. Just recall the old military adage: “When you assume, you make an ass out of u and me”. The potential for some sharp FX market moves in particular are still very evident.

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Via Zerohedge