In this insightful discussion on CGTN Europe Global Business, Joshua Mahony, Chief Market Analyst at Scope Markets, delves into the impact of Trump's U-turn on tariffs and the bond market. He explores the implications of China's potential response, the volatility in global markets, and the safe havens investors are turning to, including German government bonds.
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00:00Well, Joshua Mahoney, a regular on Global Business Europe, he's Chief Market Analyst at Scope Markets, and he joins us now.
00:05Great to see you, Joshua. So, was Trump's U-turn all about the bond market?
00:12Well, certainly last week's U-turn was in terms of the reciprocal tariffs on every country apart from China.
00:18But China is key to this, quite frankly. I mean, look, ultimately, we didn't necessarily know that this was going to happen in terms of the bond market,
00:25because what had happened is that Donald Trump came in, he announced the tariffs. We actually saw a sharp move lower in terms of bond yields.
00:33It meant that the cost of borrowing was cheaper for the U.S., and everyone said, look, this is all part of Donald Trump's grandiose plans for driving down the cost of borrowing.
00:42He's got $9 trillion worth of bonds that are maturing this year. That means they have to roll over, they get refinanced, and they need to bring down the cost of that finance.
00:51Now, unfortunately, it didn't take long for markets to actually start to dump U.S. bonds. It meant that the yields went back up.
00:58So, we started at 4.3, we got down below 4 percent. Everyone said, how clever of Donald Trump.
01:03Then it spiked up to 4 percent, and it pushed Donald Trump to actually try and essentially fix this problem, and that's where he pulled the reciprocal tariffs.
01:11And there's some concerns here that the longer this trade war with the Chinese goes on, the more likely it is that the Chinese will just dump those tariffs, those treasuries that they hold,
01:22further exacerbating the problem that Donald Trump was faced with last week.
01:25Well, last week, the markets went haywire. Let's see what happens this week.
01:30They seem to be on the up, but, you know, it's volatile.
01:32But with overseas investors fleeing American assets, is anywhere safe on global markets right now?
01:39Well, it's difficult because, you know, if you're looking at specific indices per se, all of them will be impacted by a global recession if that's how it comes to pass.
01:51And so, you know, you can't necessarily say, oh, you know, if the U.S. suffers, then the rest of the world is fine because it would also raise inflation for other parts of the world and the like.
01:59So other sectors have done well. You know, if you're looking at, say, consumer staples, it's done relatively well, the utility.
02:07So some of those sort of haven areas and also gold, of course, reaching record highs on a habitual basis.
02:13So people really are trying to flock to safety and havens rather than a particular region right now.
02:19What about Europe's traditional safe haven? I'm talking about German government bonds, bunds. Are they back in fashion?
02:25Well, interestingly, as we've seen that rise in terms of the U.S. 10 year yield, we have not seen that in terms of the German bonds.
02:35We've seen them continue to move downwards, which shows that people are demanding more of them.
02:39People are happy to get into them. And it comes at a time where we, of course, have the threat of a potential trade war with the U.S.
02:46But those reciprocal tariffs were removed. The Germans already have started to lift the amount of debt that they're willing to take on.
02:53So they've made a change in terms of the legislation for that.
02:56And we're looking at a massive bump in terms of spending in Germany and the eurozone, increased infrastructure and defense spending.
03:02So Germany right now, in terms of a sort of relative growth movement, looks relatively decent,
03:07whereas people have started to downgrade the outlook for the U.S., which to some degree had been priced for perfection.
03:14Now, the IMF says the world's geopolitical threat is at its highest level in decades.
03:20Joshua, are we headed for financial meltdown?
03:25Well, I guess you've got to look at the geopolitical side of things and then the sort of financial side of things.
03:30And I guess the two there certainly is some intertwining between the two of them in terms of geopolitical.
03:37There's the trade relationships and the breakdown of trade relationships, notably between supposed allies like Canada, Mexico, Europe and the U.S.
03:46But at the same time, the U.S. are trying to sort of resolve the conflict between Russia and Ukraine.
03:53You've seen talks over the weekend with Iran. So that's potentially going to ease off in some of these other areas.
03:58But the financial perspective is certainly key because this huge amount of debt that the U.S. is having to roll over,
04:05if we continue to see upside in terms of yields, in terms of borrowing costs,
04:10then the U.S. just gets swallowed under a huge amount of debt that just continues to balloon.
04:16And those interest payments continue to balloon.
04:18Elon Musk has come in to try and cut some of the costs, but I don't think that's really going to touch the sides, so to speak,
04:24because there's a lot of it to deal with.
04:27It certainly is. Joshua Mahoney at Scope Markets. Thank you very much.