Over the past few years, global politics have shifted dramatically, creating an increasingly fragmented world. This isn’t just about skirmishes in faraway regions or diplomatic feuds at the United Nations. It is about how these tectonic shifts are fundamentally reshaping economies, trade, and markets in ways that affect us all. Businesses, investors, and entire countries are being forced to navigate an increasingly volatile and unpredictable landscape where old alliances crumble, new powers rise, and economic cooperation is no longer a given. With Donald Trump in the running to occupy the Oval Office for a second stint, geopolitical concerns move up yet another notch on the agenda.
This week’s key themes:
- The global environment remains full of geopolitical risks and tension
- US Treasury yields approach two-month highs
- Earnings season in focus on Wall Street
- Gold breaches record highs, yet again
- Dollar remains on the front foot at its highest levels in 11 weeks
A FRAGMENTED WORLD
If you asked what the key drivers of this ever-increasingly fragmented world are, the answer would be, “A cocktail of political, economic, and social forces that, when combined, produce uncertainty and instability.” These forces are reshaping everything from global trade routes to the price of energy, and they are sending ripples across the financial markets and rattling investor confidence. They are made up of a number of key drivers.
The global power shuffle
The old-world order, where Western powers—particularly the United States (US)—held unchallenged dominance, is being shaken to its core. Asia, led by China’s meteoric rise, has emerged as a key player on the global stage. China’s economic expansion has not just created tensions in trade but has also sparked rivalries in technology, security, and diplomacy. For example, the US-China trade war wasn’t just about tariffs. It represented a much larger struggle for global influence, with technology being one of the fiercest battlegrounds.
What we’re witnessing now is not just competition but a realignment of global power structures. China’s Belt and Road Initiative, its growing influence in Africa, and its strategic partnerships with countries previously aligned with Western interests are causing friction with the US and its allies. This power shift means businesses and investors must consider a multipolar world, one where the US no longer calls all the shots.
The rise of economic nationalism and populism
Economic nationalism, once a fringe ideology, is now at the heart of major economies. The policies of leaders like Donald Trump, with his “America First” mantra, have catalysed a broader global trend of protectionism. We see this reflected in movements like Brexit, where the UK severed ties with the European Union in a bid to reclaim control over its own trade policies and borders.
This wave of nationalism often stems from growing dissatisfaction with globalisation, which many blame for widening inequality and job losses in traditional industries. Nations are now increasingly focused on protecting their own interests rather than fostering global cooperation, leaving multilateral agreements and international trade deals in limbo. This insular approach is reshaping economies in the Americas, Europe, and beyond, with populist leaders advocating for policies that prioritise national over global interests.
The technological tug-of-war
Economic nationalism, once a fringe ideology, is now at the heart of major economies. The policies of leaders like Donald Trump, with his “America First” mantra, have catalysed a broader global trend of protectionism. We see this reflected in movements like Brexit, where the UK severed ties with the European Union in a bid to reclaim control over its own trade policies and borders.
This decoupling of technology sectors is having ripple effects across the world. Companies that once operated on global supply chains are now facing disruptions and regulatory challenges. Investors, too, are grappling with the uncertainty as they try to predict which countries or companies will come out on top in this new technological arms race.
Energy security and climate conflict
As the world transitions to renewable energy, the demand for critical minerals like lithium and cobalt is intensifying, creating new flashpoints in the geopolitical landscape. Nations rich in these resources—like those in Africa and South America—are suddenly finding themselves at the centre of a global scramble for control. Meanwhile, traditional energy powerhouses, like Russia and parts of the Middle East, are grappling with the economic implications of reduced reliance on fossil fuels.
The transition to greener economies isn’t just about resources, though. Climate change itself is becoming a geopolitical issue. Countries are clashing over environmental regulations, carbon emissions targets, and the financial burden of transitioning to clean energy. These conflicts add another layer of complexity to already fraught international relations, further destabilising regions dependent on energy exports.
Regional conflicts and their ripple effects
Regional conflicts have always had the potential to cause global disruptions, but in today’s interconnected world, their impact is even more pronounced. The Russia-Ukraine war is a perfect example. Russia’s invasion of Ukraine led to disruptions in global energy and food markets, driving inflation to its highest levels in decades. Europe, heavily reliant on Russian gas, found itself in the throes of an energy crisis, while the blockade of Ukrainian grain exports threatened food security around the world.
These regional flashpoints are not just humanitarian crises—they have far-reaching economic implications. Investors must now factor in the possibility of sudden supply chain disruptions, commodity price spikes, and broader market volatility as they navigate these increasingly unpredictable regions.
Global flashpoints shaping markets
The tension between the US and China continues to play out in trade policies, technology battles, and even diplomatic standoffs. This rivalry casts a long shadow over the global economy, particularly with the possibility of a second Trump presidency reigniting the flames of US economic nationalism. Trump’s first term was characterised by trade wars and a withdrawal from international agreements—moves that rattled markets and disrupted global alliances. If he returns to office, we can expect more of the same.
The Russia-Ukraine war has reshaped global commodity markets, particularly in energy and food. Europe’s scramble to find alternatives to Russian gas led to price spikes, while the war’s disruption of Ukrainian grain exports sent shockwaves through global food supplies.
Meanwhile, tensions between China and Taiwan remain a significant concern. Taiwan’s critical role in global semiconductor production means that any conflict in the Taiwan Strait could have devastating consequences for industries worldwide. The mere threat of military action has already prompted companies to seek alternative sources for these vital components.
In the Middle East, long-standing rivalries between nations like Saudi Arabia and Iran, coupled with the ongoing conflict in Gaza, continue to influence oil prices and market stability. Any disruption in the region can send shockwaves through global energy markets, making the Middle East a perpetual wildcard in the geopolitical equation.
Finally, North Korea’s nuclear ambitions add a layer of unpredictability. The potential for escalation in the Asia-Pacific region could disrupt global trade routes, with far-reaching consequences for supply chains and market stability.
Looking ahead
Geopolitical tensions are increasingly felt in global financial markets. Protectionism, sanctions, and trade wars are driving up costs, adding to an already dynamic and volatile environment. The additional uncertainty that comes with geopolitical tension often causes flight to safe-haven assets, while disruption of supply chains contributes to supply shocks that ripple across borders and oceans.
Whether it’s the US-China rivalry, energy security, or regional conflicts, these dynamics will continue to shape the global economy and financial markets for years to come.
GLOBAL MARKET PULSE
Bonds: US treasury yields climb
In the bond market, the yield on the 10-year US Treasury note climbed to over 4.05%, inching closer to its two-month high of 4.11%. The rise reflects recent economic data pointing to a resilient US economy. Retail sales in September surpassed expectations, proving that the US consumer remains strong despite higher interest rates. Unemployment claims also came in lower than forecasted, further indicating a tight labour market. Although markets are still expecting modest rate cuts from the US Federal Reserve (Fed) this year, the data suggests that there’s no rush for aggressive cuts. Expansionary fiscal policy, hinted at by US presidential candidates, is also expected to keep inflationary pressures up over the long term, which could mean higher yields for longer.
In contrast, the yield on the United Kingdom’s (UK’s) 10-year Gilt dropped to below 4.10%, its lowest level in two weeks, as UK inflation eased more than anticipated. September’s inflation rate fell to 1.7%, marking the first time in years that it dipped below the Bank of England’s (BoE’s) 2% target. With inflation slowing and wage growth cooling, the BoE may be gearing up for another rate cut, possibly as soon as November, with another likely to follow in December.
Meanwhile, in South Africa, the yield on the 10-year government bond has settled at 9.50%.
US stocks push higher, UK and South Africa markets mixed
US stocks gained momentum on Thursday, buoyed by stronger-than-expected economic data. The S&P 500 rose by 0.5%, while the Nasdaq added 0.7%, and the Dow Jones increased by 140 points, building on the previous session’s record highs. Solid retail sales figures underscored the strength of the consumer sector, while a surprisingly high Philadelphia Fed Manufacturing Index gave further evidence of a resilient economy. Chip stocks got a particular boost, with shares in Taiwan’s TSMC rising 9%, lifting other tech giants like Nvidia, Broadcom, and AMD. As earnings season continues, alternative investment management company, Blackstone, surged 5.8% after reporting better-than-expected earnings, while investors were keeping an eye on entertainment streaming service, Netflix, which surged by 4.7% after beating earnings expectations.
In the UK, the FTSE 100 was flat, a contrast to its 1% gain from the day before. Losses in mining stocks, driven by disappointing Chinese housing market stimulus and increased iron ore production, dragged the index down. Despite this, companies like food and grocery delivery company, Deliveroo, and pest control company, Rentokil, posted gains.
The South African JSE Index edged slightly lower as local traders awaited corporate earnings reports for further clues on the global economy. Local paper and packaging company, Mondi, led the decline, falling 7% after reporting a drop in core profits, while mining company, Kumba Iron Ore, followed suit due to China’s underwhelming housing support measures. On the flip side, gold miners saw gains, buoyed by rising gold prices.
Oil stabilises, gold breaks records
Oil prices steadied on Thursday after a four-day slump, with Brent crude holding above $74/barrel. Traders remained cautious amid the conflict in the Middle East and disappointing economic news from China. While Israel signalled it would avoid striking Iran’s crude facilities, US airstrikes on Iran-backed rebels in Yemen kept tensions high in the region. The International Energy Agency forecasted a global oil surplus in 2024, driven by increased production outside of the Organization of the Petroleum Exporting Countries, and sluggish demand growth which is further capping oil prices.
Gold continued its rally, reaching a record high of above $2,700/ounce. The demand for safe-haven assets remains strong amid geopolitical uncertainties and recent moves by central banks. Despite the rising US dollar and Treasury yields, gold remains attractive to investors seeking a hedge against market volatility. Disappointing economic measures from China, particularly its lacklustre fiscal response to the ongoing property crisis, also added to the allure of gold as a safe-haven asset.
Dollar surges, euro and pound falter, rand under pressure
The US Dollar Index surged toward 103.75 on Thursday, its highest level in 11 weeks. Stronger-than-expected US retail sales and fewer unemployment claims have led investors to believe that the Fed might slow the pace of its rate cuts, giving the greenback a boost. Speculation about a potential Trump victory in the upcoming US election has further strengthened the dollar, as his inflationary policies would likely reduce the need for rapid Fed easing.
In contrast, the euro fell to $1.08/€ after the European Central Bank (ECB) cut interest rates by 25 basis points for the third time this year, bringing the deposit rate to 3.25%. This rate cut comes as inflation in the eurozone fell to 1.7% – the first time it has dipped below the ECB’s 2% target in over three years. The market is now anticipating further rate cuts from the ECB in the coming months.
The British pound also fell sharply, dropping below $1.30/£. The UK’s inflation came in lower than expected, solidifying expectations that the BoE will cut rates next month. Investors are now pricing in an additional 45 basis points of rate cuts by the end of the year.
The South African rand weakened to R17.74/$. The rand has been under pressure due to a combination of factors, including China’s weak stimulus-response and repositioning by investors who expect a more gradual Fed rate-cutting cycle. As a commodity-driven currency, the rand is particularly sensitive to fluctuations in global demand, especially from China, South Africa’s largest trading partner.
Key Indicators:
USD/ZAR: 17.61
EUR/ZAR: 19.10
GBP/ZAR: 22.95
GOLD: $2,712.31
BRENT CRUDE: $74.78
Sources: Refinitiv, Trading Economics, Investing.com, Reuters, World Trade Organisation and Deloitte.
Written by – Citadel Advisory Partner and Citadel Global Director, Bianca Botes.