Oil prices, the dollar, sanctions, trade tensions, trips to the International Monetary Fund and shock election results.
Take your pick and financial markets felt turbulence this week with ramifications for the world economy.
Iran and Oil
U.S. President Donald Trump’s announcement to pull out of the Obama-era deal and reinstate sanctions on Iran sent ripples through markets, pushing oil further above $70 a barrel. Minimizing the economic damage will be key to the country’s efforts to ensure domestic stability. $200 billion in potential energy deals for Iran now hang in the balance. Higher crude prices will likely hit economies elsewhere.
Emerging markets are facing perhaps their biggest stress test since the Federal Reserve’s 2013 “taper tantrum” episode. Currency volatility and capital flows are among the worries on the horizon in Asia, while central banks across emerging markets are being put on the spot to manage fresh stresses, particularly in India. Almost two dozen key EMs will decide on interest rates over the next two weeks, but Federal Reserve chief Jerome Powell says he’s confident these markets can handle policy normalization in advanced economies.
Argentina, Malaysia and Turkey
It’s back to the future for Argentina and Malaysia. Argentina this week asked the International Monetary Fund for help to stem a five-month rout in the peso, but locals are unlikely to be happy given their troubled history with the lender. Malaysia is dealing with fresh uncertainty about the economic and monetary policy outlook after a stunning election result returned Mahathir Mohamed to power. Meantime, Turkish officials are vowing to take necessary measures to reduce pressure on exchange rates as central bankers met with President Recep Tayyip Erdogan.
U.S., China, and U.S.-China
Ongoing drama between the world’s two biggest economies kept up momentum, even as China seemed to soften its tone on trade over the weekend after the Trump team went home without much progress to report from meetings. A reported Trump-Xi phone call Tuesday previewed a top Chinese economic official’s visit next week to Washington. There was less harmony in Geneva, where the two powers have clashed at a World Trade Organization gathering. Nafta negotiators continue to struggle on a revised deal.
Central Banks Wobble
Central banks are wobbling on the exit ramp from a decade of easy money. The Bank of England was the latest to leave interest rates on hold, weeks after officials signalled a hike was likely. The Reserve Bank of New Zealand signalled no plan to raise rates until late 2019, while Serbia stayed on hold after two surprise cuts. At the Federal Reserve, a high-ranking official said the U.S. central bank's balance sheet will never return to its pre-crisis level.