Federal Reserve move will trump tariff play

PRESIDENT Trump is supposedly in the process of plunging the world into a devastating trade war that would likely unleash an “economic winter” as bad and as extended as the Great Depression of the 1930s.

Yet markets seem surprisingly relaxed.

Wall St is at, or within, a whisker of all-time highs, depending on the index.

But even more instructively, the very sensitive – usually skittish and wildly reactive – Hong Kong and Shanghai markets haven’t gone over a cliff.

On the day that Trump pressed the tariff button on – another – $US200 billion of Chinese exports, investors essentially yawned in Hong Kong, which went up half a per cent; and in Shanghai, even broke out the champagne, where the market promptly jumped 2 per cent.

Further, both Chinese markets (which are also the two critical real-time financial gateways into and out of China) have been essentially flat over the past month at a time of everescalating words and action, while Wall St has edged up a couple of per cents.

So, have investors discounted the Trump rhetoric? Have they finally twigged that it’s a classic Trump “art of the deal” negotiating process; and that it can arrive at a winzero outcome if not a winwin one, but not the normal lose-lose outcome of a trade war? Or have they got it catastrophically wrong: that we are all in the process of sleepwalking into 2018’s version of 2008? rate rises in 2019. The second would feed this weird – as in, contradictory – combination of general overconfidence in both equity and bond markets, while planting serious seeds of doubt among the more observant or just risk-averse investors.

Importantly, and dangerously, any Fed move wouldn’t necessarily trigger an immediate market response. But I have no doubt that this is the decision, of all eight that we’ve had since Janet Yellen started tentatively lifting from zero, which will have the biggest impact.

It would only be the usual 25 points and a rubbery 25 points at that (as the Fed can play between the top and bottom of such a range), but it will certainly have a magnified impact on us specifically.

It would really pose the question – for our dollar, for our market rates and the cost of bank money; for both property and equity asset values.

It would take the Fed rate to 2-2.25 per cent, significantly above the RBA’s 1.5 per cent.

Absent a meltdown that gap is coming, whether next week or at the Fed’s December meeting. That’s a big enough question in its own right; what will be the broader environment when it lands?