By Michael Every of Rabobank
Stocks continued to hit all-time highs yesterday even as the balance of op-eds in financial media talk about the collapse of the liberal world order and threats to liberal democracy itself. Both can be true simultaneously, but caveat emptor on the asset and op-ed side. German stocks sold off when Hitler assumed power then rallied until the Battle of Stalingrad… at which point those trades literally blew up; and if every op-ed writer who deserved it got real egg on their face, the price of that staple would be soaring again. Yet today Bloomberg claims stock traders fear missing out on this rally more than any looming tariffs, “because markets.”
In their corner now is “Main Street not Wall Street’ US Treasury Secretary Bessent, who just attacked the Fed’s “Tariff Derangement Syndrome” to also call for rate cuts. That’s as Fed Chair Powell admitted the FOMC had gone on hold due to the size of the US tariffs being floated, then hinted at a rate cut as soon as this month.
Who can blame markets for a ‘buy all the things’ response to such a potential pivot? Yet there is that pesky tariff issue to overcome first, and de range of potential outcomes there is de syndrome we need to focus on. What we’ve seen in data so far reflects a universal tariff of 10% for everyone but China, who faces around 50%, and Beijing then dumping goods that were heading to the US on the EU, acting as a deflationary force – but one that will ultimately be rejected by trade actions. If tariffs change, the data will change. In short, for markets if not central banks, wait and see is not necessarily a bad option in a potentially crucial week.
Indeed, President Trump just said he won’t extend the July 9 deadline to strike trade deals, and even close allies like Japan could face higher tariffs. Moreover, while we just had insider whispers that the EU accepts the best it can get is a 10% universal tariff and quota exemptions for sectoral tariffs, there are others that it will now take a harder line. Clearly, different journalists are being fed different lines by different stakeholders – and that lack of unity is Europe’s problem in a nutshell. However, it's also the Fed’s… and the ECB’s, BOJ’s, BOE’s, BOC’s, PBOC’s, etc.
Also note China’s People’s Daily reports CCP Chairman Xi just argued the country needs to “govern the disorderly competition of enterprises at low prices in accordance with laws and regulations” – in other words, stop race-to-the-bottom price cuts on EVs and solar panels, etc.
Meanwhile, fiscal policy doesn’t say major monetary loosening is appropriate…. except if fiscal dominance necessitates it, which implies financial repression to follow. For three examples:
- The Senate narrowly passed Trump’s Big Beautiful Bill, to Elon Musk’s fury. It now goes back to the House, where it faces a potentially difficult passage for its self-imposed 4 July deadline. That’s as Trump mused that he’d DOGE Musk’s firms and even look into deporting him if he makes political trouble over the BBB, and Treasury Secretary Bessent stated: “If Elon sticks to rockets, I'll stick to finance." Until he gets stuck running the Fed(?)
- UK PM Starmer managed to pass his welfare bill, but only with massive concessions to rebels that will boost the fiscal deficit significantly. There appears no appetite for any more spending cuts if we were to see the global negative impact of a trade war ahead; and
- The French PM survived a no confidence vote over proposed cuts to welfare there too, but only because the far-right National Rally propped him up, again showing their new parliamentary muscle - and they say they reverse at any point that suits them.
Moreover, as populism rises and the ‘free’ movement of goods is undermined, Poland introduced border checks with Germany and Lithuania inside Schengen, weakening the free movement of people, and the FT bewails less free movement of capital re: the US (and UK) carve-outs from the G7 minimum corporate tax agreement, as each locality tries to keep its revenues for itself.
As in geoeconomics, wait and see is also evident in geopolitics.
On the upside, Israel has reportedly agreed to a 60-day ceasefire with Hamas, to which it has yet to respond, in what looks like a move that will free remaining hostages and allow broader regional peace deals. There’s also been a sharp decline in Houthi missile and drone attacks on Israel following hits to Yemen’s ports and to Iran.
On the downside, the US says Iran loaded naval mines onto its ships during its recent threat to block the Strait of Hormuz(!), and satellite images show it’s built a new access road at Fordow and moved in construction equipment - will the US or Israel have to hit it again? True to form, the EU says talks on Iran’s nuclear program should “restart as soon as possible.” Close by, Turkey told Europe its stand behind its joint maritime claim with Libya --which effectively bisects the eastern Mediterranean-- and that’s on top of Ankara’s other recent claim on Greek waters.
The Pentagon has halted scheduled shipments of air defence missiles and other precision munitions to Ukraine on worries US stockpiles are too low after being expended in the Middle East. This is a critical problem for Ukraine, and for Europe by proxy – and an expensive one for both of them. As a US spokesperson noted, “This decision was made to put America’s interests first following a DoD review of our nation’s military support and assistance to other countries across the globe. The strength of the US Armed Forces remains unquestioned - just ask Iran.”
As stressed here for many years, this is critical for markets overall: our global financial architecture ultimately rest on US military hegemony, but it has whittled down the US ability to produce enough weaponry to push-back against the axis of forces now trying to undermine it. Something will have to give, and markets won’t like it either way: the emerging argument is it’s either tariffs, higher defence spending, and possible financial repression, or something potentially worse – not ‘peace through strength’ but risks of ‘war through weakness’.
Yet as an example of how the US can use still realpolitik to push back for now, and will try to do so more ahead, it’s mused the recent Democratic Republic of Congo-Rwanda peace deal will effectively see the former grant the US access to $2 trillion of key minerals it holds as quid pro quo for D.C. stopping a Rwandan militia it had helped fund. By contrast, Europe is in the middle of an offsite to form a committee to set up a working group to create a new acronym to help it access key minerals in unstable places like Africa. I exaggerate, of course, but you get the point.
But do central banks get it? From those who talk to them, no, they really don’t. They apparently can’t even hear the word ‘tariffs’ without suffering from a form of derangement syndrome, and the thought of political, economic, and military statecraft is still alien to them after a career of bean-counting, physics-envy maths black magic, and portentous prognostication.
So, do markets get it? Do we need to ask? They are busily plotting out future rate cuts and buying all the things, even when only some of the things would be worth buying in that kind of environment. That’s a tariff derangement syndrome of another sort.
