Week signals: The empire strikes back
Plus: watch points for Kosovo, Ukraine, the Caucasus, Haiti, and Vietnam.
This week:
IN REVIEW. Comebacks and comedowns.
UP AHEAD. Bridges in Kosovo, back-channels in Ukraine, deals in the Caucasus, danger in Haiti, and Sino-Vietnamese relations.
The Week in Review: Eye of the tiger, or eye of the storm?
Everyone loves a comeback story. Whether in Simone Biles' Paris gold, or Justinian's reconquest of Italy, they’re rare but memorable. There's been a similar narrative this week, with Ukraine's incursion into Kursk and the Democrats’ polling lead. Combined with Iran's seeming hesitancy at striking Israel – ostensibly due to ceasefire talks, and the US Navy's bolstered presence – it seems the liberal rules-based order, and the Washington Consensus, are back.
Yet away from the popping of commentariat champagne corks, there are vulnerabilities in these early victories. Kyiv’s salients are thin and its frontline is collapsing. Kamala Harris’s lead is more a function of saying little, than of voters warming to her ideas (and where they’ve been expressed, such as on price controls, many are turned off). Iran’s delayed retaliation is more a function of prolonging the anticipation (and Israel’s alert systems) than of cold feet.
In financial markets, which have mostly rebounded, we may similarly be in the eye of a storm. Japan’s 5 August crash was overdone, and fears of a US recession have long been overblown, but the poor fundamentals expressed last week were still poor this week. Earnings multiples, particularly in technology stocks, remain high. Commonplace logistics snarls and trade policy risks aren’t priced in, let alone the tail risks of a Taiwan invasion or Donald Trump’s threatened 60% tariff on Chinese goods. Similarly, the cost of capital – no longer just a function of US interest rates in an increasingly multipolar world – is something many valuations could be getting wrong.
It's easy to list the risks, but harder to ascribe probabilities to plausible scenarios. We’ve begun to do that with our Geopolitical Edge product for clients (click here for more). And it’s easy to extrapolate the main headlines, but more time-consuming to conduct regular horizon-scanning exercises (which is why we do this every Saturday in the second half of this email). Weak signals, after all, can be just as important as the big stories, and in terms of generating investment alpha or anticipating business risk, they’re usually more important.
So this week, beyond the big stories in the US, the Middle East and Russia, we’ve been focussed on five things: