Happy 4th July .... but good cheer is in short supply.

The Financial Times has a number of thought-provoking articles this morning. If the subjects vary, the most obvious common link is that the tone of all of them is more anxious than optimistic. That's often the case of course .... storm clouds are generally more newsworthy than sunny vistas but right now a state of anxiety would seem to sum up the condition of the world and its markets pretty well.

ref :- "Falling renmimbi provokes renewed global anxiety over forex wars" , The Financial Times, Markets and Investing

There aren't too many sure things out there at the moment, but it's a pretty safe bet that if the Chinese Yuan (Renmimbi) carries on falling in value then Donald Trump will call China out for deliberately weakening their currency to gain an unfair trade advantage. With USD / CNY last at 6.63 per dollar, we are still some way off the record weak point for the yuan / renmimbi of 6.93 set amid escalating fears of a slowdown in China in January 2017. But it's the fact that the rate has since been below 6.30, and that the recent move has not been met by any intervention by the People's Bank of China despite the currency falling for 11 out of 13 sessions (NOT like the PBoC at all) that has given rise to renewed accusations of currency manipulation.

Actually, that's not entirely accurate .... the PBoC has intervened verbally, which prompted a small recovery rally from above 6.70 to today's rate but Mr Trump will not be the only one demanding more decisive action should the yuan resume it's fall.

The President's opinion was no doubt formed during the long period up to 2014 when China definitely was guilty of fostering a weaker currency. The irony is that more recently, when Mr Trump's allegations have been at their loudest, China had desisted from such unfair practices, albeit arguably for reasons of its own self-interest more than in a search for ethically higher ground. The question is, is China now deliberately engineering a weaker currency ?

Last week, we suggested that we thought that, up to that point at least, such a scenario was unlikely  --  the danger of huge capital outflows made such a tactic worse than self-defeating. But inevitably the looming imposition of tariffs on Friday  --  for some, the actual start of a trade war in which the US has more weapons than China (being much the larger importer)  --  encourages speculation that China is reverting to tactics of the past now that things are getting nasty.

China would argue that according to Mr Trump's rules, they cannot win. They were urged to make the Yuan more responsive to market forces, and the Yuan strength that was the result of that was welcomed. Now that market forces are pushing it the other way, they stand accused of manipulation. China has a point ..... market forces are indeed weakening the currency . A bear market in stocks and a slowing economy due to restrictions on credit (entirely sensible), against a background of rising US rates and an all-round strong dollar .... well, it would be very odd if the currency hadn't weakened. The authorities in Beijing might well ask : "Well, make your mind up .... do you want the rate to be market-led, or not ?"

The truth is very possibly somewhere between the two extremes .... as it normally is. In the context of the onset of a trade war,  Yuan weakness has enough attraction for China for them not to actively stand in its way. But a new onslaught of capital flight is something that China will be desperate to avoid, and we can expect the PBoC to stop sitting on its hands and to get much more aggressive if that outcome looks likely.

ref :- "Pressure rises for intervention as Turkish lira slides after inflation hits 14-year high" , The Financial Times, Markets and Investing

Another story of a tumbling currency, and another topic revisited. You may remember that we were somewhat flummoxed by the initially favourable market reaction given to President Erdogan's across-the-board victory in Turkey's elections. We were worried that we must have missed something .... well, it can happen. Then after about 12 hours things reversed themselves  --  which seemed more logical  --  before settling somewhere in the middle with the markets seemingly undecided which way to go. Back the certainty provided by Mr Erdogan's victory, or sell Turkish assets at the prospect of his taking a firmer and wrongheaded grip on management of the economy ?

Yesterday's data gave things a push towards the latter strategy. June year-on-year inflation came in at 15.4%, a big leap from May's 12.2%. The news sent the US dollar / Turkish lira rate from 4.67 to 4.72 in the blink of an eye.

We know Turkey's story pretty well by now .... a massively overheated economy (over 7% growth last year) has fostered spiralling inflation. Markets are riddled with vicious circles of course, but the inflation/currency relationship is about the simplest and the most crucial to the long-term health of an economy : Inflation begets a weak currency, a weak currency begets more inflation.

It's accepted by just about everybody apart from Mr Erdogan and his acolytes that in such a scenario the defeat of inflation must supersede other considerations, and to do so one must accept the tough medicine of higher interest rates. This would slow the economy, that's just a price that has to be paid. But the President's designs on monetary policy at the expense of the central bank mean that such obvious measures are anything but guaranteed.

Above and beyond Mr Erdogan's truly bizarre claim that lower rates lead to lower inflation ( !?!?), if his campaign promises are to be believed he now seems to be abandoning his earlier reputation for fiscal good sense by embarking on a massive programme of public spending. A stimulus for growth (which he can't seem to see beyond), but TERRIBLE for inflation. It's hard to imagine a worse cocktail of policies in Turkey's current circumstances .... according to accepted economic theory, at any rate.

The hope must be that the continuing onslaught of data and market reaction to it, whilst painful in the short-term, will convince the President to keep his hands off monetary policy and let the central bank do what's required, even if it goes entirely against his own natural instincts. If not ..... well, you ain't seen nothing yet.

ref :-  "Trump's war on the liberal world order" , The Financial Times, Opinion by Martin Wolf

We're going to do little more than point you towards this piece .... Mr Wolf and the FT itself are of course bastions of the liberal world order themselves, and as such Mr Trump and his supporters would say that they are guilty of exactly the sort of thinking that needs changing.

So remember that this is an "Opinion" piece, and makes little or no attempt to present both sides of any argument. Suffice to say, if you're not a Trump fan (and we of course are entirely impartial in all things) you'll find plenty of common ground in a liberal take on Mr Trump in the context of history, and of the legacy he could leave viewed from some point in the future ..... and of the dangers his policies are stirring up that go way beyond mere economics. You'll also get some meaty descriptive quotes for dinner party conversation .... if you're sad enough to talk about Mr Trump at dinner parties, that is.

If you ARE a Trump fan .... well, best to read something else.