Malaysia likely next victim of trade sanctions by United States

Lately, Malaysian Prime Minister, Mahathir Mohamad has expressed concerns that his exports-reliant country could be hit with trade sanctions amid rising protectionism highlighted by the Sino-US tariff war. While Mahathir did not mention the source of possible sanctions on the Southeast Asian country, he expressed disappointment the way proponents of free trade were now indulging in restrictive trade practices on a grand scale.

“Unfortunately, we are caught in the middle,” said Mahathir referring to the Sino-US trade war. “Economically we are linked to both markets, and physically we are also caught in between for geographical reasons. There are even suggestions that we ourselves would be a target for sanctions,” he added

The US and China were two of the three biggest export destinations for Malaysia between January and August this year. Singapore was the top destination.

To cushion the impact of the collision between the superpowers, Mahathir said Malaysia was collaborating more with its regional neighbors.

Mahathir also complained of being bullied by powerful nations, referring to a campaign by European countries against Malaysia’s agricultural mainstay, palm oil. The edible oil contributed 2.8% of Malaysia’s gross domestic product last year and 4.5% to total exports.

“Having cleared most of their forests and refusing to reduce their noxious emissions, they now try to impoverish the poor by preventing them from clearing their forest for living space and earning a living,” he said.

The European Union passed an act earlier this year to phase out palm oil from renewable fuel by 2030 due to deforestation concerns.

There are also concerns that India, one of the biggest buyers of Malaysian palm oil, would restrict imports of the product due to a diplomatic row over comments made by Mahathir on New Delhi’s recent actions in the disputed South Asian region of Kashmir.

Moreover, countries are reeling under the pain inflicted by a trade war between the most powerful economies; there is international political turmoil; savage conflicts and widespread terrorism are killing millions; and budgets that should be devoted to helping the poor are being used to buy and maintain expensive weapons of war, he said.

“There is something wrong with our way of thinking, with our value system … we still believe that conflict between nations can be resolved with war,” added the Malaysian Prime Minister.

He went on to say that “free trade” means “no protection” for small countries and their small industries, with simple products of the poor subjected to clever barriers that prevent their sale to rich markets. At the same time, globalization, despite its benefits, has imperilled the independence of smaller countries.

Applauding the efforts of the UN to end poverty, protect the environment and bring peace to all countries, Prime Minister Mahathir, underscored the need for reform in the Organization, particularly the Security Council.

“Five countries on the basis of their 70-year-old war victories cannot claim to have a right to hold the world to ransom forever,” he said, underling the need to reform the veto rights in the Security Council.

Lackluster global currency markets

Investors do not seem keen in buying EUR because they are worried about the political situation in Italy, the possibility of a recession in Germany, the prospect of aggressive easing from the European Central Bank and the ongoing risk of more tariffs from the US on Chinese goods.  This week, Italy's Prime Minister Conte resigned, turning crisis into chaos for the Eurozone's third largest economy.  Of all the EUR troubles, Italian politics has the most limited impact on the currency.  Europe is no stranger to Italian political uncertainty (they just had elections in 2018 and who can forget Berlusconi's countless scandals) and this crisis was a long time coming. Instead of rising, Italian bond yields fell because investors are hoping that the new government will be more pro-business. Talks have already begun to form a majority in Parliament, which could hopefully pave the way for a smooth transition for Matteo Salvini, who is widely expected to become the new Prime Minister.  

Recession on the other hand is a serious risk for Germany. According to the Bundesbank, Germany's central bank, the country could very likely fall into a technical recession in the third quarter. Last week they predicted that GDP could continue to fall slightly. Growth has been weak for the past year as the country posted growth in only one out of the last four quarters. Unlike Italy, Germany is a serious problem for the Eurozone. As the region's largest economy, their slowdown will be felt across the continent. Although, it became evident last week that German and EZ PMIs rose in the month of August, the uptick in activity won't stop the European Central Bank from easing.  Industrial production is weak, investor sentiments are bearish and there's a good chance that the upcoming German IFO business confidence index will decline as well. Auto sales have taken a big hit and fears of further tariffs along with a disorderly Brexit are mounting.  Just this past week, the US lawmakers urged the Trade Representative's Office to hold off imposing new tariffs on European olive oil. In November, the Trump Administration will decide whether to impose duties on European autos.  With all of these risks in mind, the European Central Bank will have no choice but to ease next month and they could deliver a bigger than expected stimulus package.  This prospect will keep EUR/USD under pressure.   

Meanwhile the US Fed is really going out of its way to downplay the need for easing.  According to the FOMC minutes, most Fed officials saw the July rate cut as a mid-cycle adjustment and not the start of an aggressive easing program.  Since then comments from policymakers such as Mester, Rosengren, George, Daly and Harker suggest that they may not support another rate cut.  On Monday, Rosengren said the US is in a good spot right now and there is no need to take action if their outlook stays on track. He stressed that the Fed doesn't have to ease simply because other countries are weak. On Tuesday, Fed President Daly said she supported the July cut but sees the labor market as strong and consumer spending. Fed President George seems to agree - she said just this morning that she's not ready to provide more policy accommodation without seeing evidence of a slowdown. Like Rosengren, she described the economy as in a good place. Fed President Harker admitted that he reluctantly supported the July rate cut and felt that "we should stay here for a while, see how things play out."  So while President Trump wants the Fed to be proactive and has taken every opportunity this week to lay on the pressure, US policymakers don't seem to be onboard with the idea.  If that's true, it would be significantly misaligned with market expectations as Fed fund futures price in 100% chance of easing next month.  Now it is all up to Jerome Powell to clear the air. He is scheduled to talk on Friday and the tone of his speech could determine the direction for USD in the weeks ahead.

Who will emerge victorious in Sino-US trade war?

At the beginning of 2017, Donald Trump, President of United States tried to contain Beijing by restrictive economic policies. At the time, he stated that US$346 billion US trade deficit was due to imbalanced trade with China. In year 2019, this deficit has reached US$419 billion, which shows well that Trump's economic policies toward Beijing are not yielding positive results.

China's stoppage of US agricultural products and imposition of reciprocal tariffs on American products indicate that this Asian economic super power does not intend to surrender to the US. In such circumstances, there will be no opportunity for President Trump and his companions to maneuver. Many US economic and policy analysts believe that in year 2020, China can hurt Trump in the re-election. It is already evident that China has become a symbol of America's economic and political failure in the world.

Lately, Bloomberg has reported that the ups and downs of asset prices on any given day are being determined, more and more, by the words and actions of three men. First, of course, is Donald Trump, who has rediscovered his power to send markets soaring—or into a tailspin—with less than 280 characters on Twitter. Then there’s U.S. Federal Reserve Chairman Jerome Powell, who repeatedly finds himself on the receiving end of nasty Trump tweets for abiding by his mandate to do what’s best for the U.S. economy, which isn’t necessarily always the same thing as what’s best for Trumph. And in Beijing, it’s Xi Jinping, the president of China who sits atop a Communist Party in which politicians and central bankers famously sing from the same hymnal, at least when the audience is outside observers.

With each of these collisions, the fragility of the global economy and markets is exposed. It seems increasingly possible that something big and important is broken. Investors who’d believed Sino-U.S. relations were stabilizing, if not improving, were caught on the wrong foot when tensions abruptly escalated. The prevailing assumption that President Trump won’t allow the trade war to continue through the 2020 presidential campaign season is being reconsidered, as the two sides appear further apart than ever. Economists at Goldman Sachs Group Inc., no longer expect a trade agreement before the election and see the Fed cutting its benchmark interest rate two more times this year in an effort to counteract the economic damage that will be done by the impasse.

A question being openly debated on Wall Street is whether lower borrowing costs will be enough to fend off a recession. There signs that economic activities in the United States are shrinking. In Europe, whose factories are caught in the crossfire between China and the US, manufacturing barometers already point toward recession. Trade war being converted into currency war—in which countries race to devalue to get a competitive edge for their exports.

Other disturbing signs are could US sell F-16 fighter jets to Taiwan? Is Washington supporting anti-Beijing protesters who’ve paralyzed Hong Kong this summer? And what could be at risk among more than a quarter of a trillion dollars of US investments in China since 1990?

All these questions are arising at a time when Wall Street’s vacation calendars are jammed and markets seem especially easy to rattle. Evidences of stock market volatility rose in August, some of the ugliest collapses in equities market over the past decade have occurred in this month.

The recent rush into safe havens sent gold to a five-year high and triggered a rally in Treasuries that pushed 10-year yields to their lowest since Trump was elected in 2016. At the same time, rates on three-month Treasury bills were higher than those on 10-year bonds—a phenomenon known as a yield-curve inversion that’s widely considered a reliable warning of an impending recession. The lower long-term yields signal that markets expect interest rates to come down in response to weak economic growth.

With each of these collisions, the fragility of the global economy and markets is exposed. It seems increasingly evident that something big and important is broken. Investors who’d believed Sino-US relations were stabilizing, if not improving, were caught on the wrong foot when tensions abruptly escalated.

The prevailing assumption that President Trump won’t allow the trade war to continue through the 2020 presidential campaign season is being reconsidered, as the two sides appear further apart than ever. Economists at Goldman Sachs Group no longer expect a trade agreement before the election and see the Fed cutting its benchmark interest rate two more times this year in an effort to counteract the economic damage that will be done by the impasse.

 According to a CNBC report, a trade war with China hasn’t tarnished his image as a champion for an unlikely group: farmers and ranchers. Farmers are one of the most visible casualties of the Sino-US trade war, which escalated sharply lately as both sides landed blows that could hold potentially devastating consequences for US agriculture, yet they appear to be sticking by Trump. More than 75% of farmers had voted for Trump in his successful campaign against Democrat Hillary Clinton in 2016. They are still sticking by him because they consider Trump a better option as compared to those running presidential race.