Europe in August was sleepless, not sleepy. Stifling heat disrupted bedtimes and the economy: critical rivers dried up, collapsing supply chains and hitting agriculture and the energy system.
Bond yields marched higher. Holidaying traders and officials returned to more public spending swallowed up by interest costs. Among central banks there is more hawkishness too. At Jackson Hole, Federal Reserve chairman Kevin Warsh implied he might have more to do. The pressure is also on the Bank of Japan with USD/JPY over 160 again. Yet how can Japan sustain its public debt with higher rates? How can anyone? There is little time to ponder as geopolitics and geoeconomics heat up in tandem.
The Middle East is quiet, and the US claims oil is flowing out of Hormuz, but they just traded fire for the first time in a month and tensions remain high. US Operation Economic Outcast to isolate Iran is choking it but risks a military response; it also threatens secondary sanctions, and removal from the US dollar system, for those aiding Tehran. Could the US confront China, Russia, Turkey, and Pakistan? The potential shocks to the global economy and markets are clear, and to US hegemony if it cannot act, “because markets”.
Meanwhile, the Houthis are disrupting Saudi’s alternative export corridor, despite its new defence pact with Pakistan and Turkey. There are worries about Turkey-Israel clashes as Ankara inserts itself deeper into Syria, Greece, India, and the UAE. Israel has boosted defence cooperation with African nations, and the rest of the region, and the Horn of Africa, are splitting into camps. One spark could set off a conflagration.
The Russia-Ukraine war is directly targeting economies. Kyiv continues to strike oil refineries, as some worry global supplies of diesel and refined products are close to a crisis point; Russia has closed Black Sea grain ports again with missile strikes, pushing prices higher. Things can get worse there. Moscow may be close to a military escalation to mobilise 500,000 men (50,000 more coming from North Korea), the use of a tactical nuclear weapon, or striking a NATO member to test Article 5. EU and UK pledges of military aid to Kyiv have increased Russia's anger towards them. With the CIA head making a surprise 15-minute trip to Moscow, as before the Ukraine war, nerves are on edge. Should Russia escalate, geopolitical logic suggests Iran would too, and vice versa, further stretching limited Western resources – and tensions are also increasing in East Asia.
Trump struck a deal for the Pentagon to take a stake in Venezuelan oil supplied at cost. Alongside expanded refinery capacity, which he will push the industry to achieve this week, it looks like greater Donroe Doctrine energy security longer term. It also looks like the economic statecraft neo-mercantilism we said would be the global norm, not “because markets”.
US-Canada trade talks collapsed. Tariffs and elbows are up. Lake Ontario was renamed Lake America, and social media is full of the public, and politicians, threatening to cut off exports or close maritime chokepoints. Prime Minister Mark Carney will attend the EU’s State of the Union address, indicating he wishes to move closer to it despite being unable to join as Canada isn’t in Europe. The realpolitik is that would further damage an economy deeply interlinked with the next-door US and mean the loss of sovereignty – a Canadian battle cry, as with Brexit – should it be possible. Iceland also voted no to restarting EU accession talks.
Europe is weeks from the decision to start a trade war with China, as major financial press op-eds talk of the need for a new global Plaza Accord to push the Chinese currency much higher. That won’t happen for a panoply of reasons: but as a result, other pressures will only increase.
On top of that, politics is looking ‘hotter’. The US midterms loom, where the Democrats are battling not just Trump but their own far-left Democratic Socialist Alliance, widening the policy Overton window away from ‘pre-Trump normality’. In Europe, eyes start to turn to the French presidential election in 2027, where a recent poll shows in all likely scenarios the nationalist Le Pen will win. Likewise, Donroe Doctrine eyes will be on Brazil’s looming presidential election.
So, yes, the world is heating up – and it’s hard to see how it will cool down again.
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Michael Every is global strategist at Rabobank
