Policy uncertainty from the Trump administration is changing how markets are behaving and could be setting the stage for a deeper correction, not just short bursts of volatility, according to James Knightley, Chief International Economist at ING.
“There’s a lot going on right now,” Knightley said, highlighting geopolitical tensions involving Greenland and Denmark, coupled with threats of new tariffs against Europe that risk re-escalating a global trade war. These issues are layered on top of fiscal concerns in Japan, where debt-to-GDP is over 200%, and the novel idea that Europe could “weaponise” its vast holdings of US assets, estimated at $10 trillion.
According to Knightley, the European response to US trade pressures is likely to be different this time. He believes European leaders will be much more robust and reluctant to quickly sign a new deal, feeling that a previous agreement was unilaterally discarded by the US. “I think Europe is likely to be much more robust in its response this time around,” he commented. This suggests a prolonged period of negotiations and, consequently, extended market uncertainty.Also Read: In a risky world, Ed Yardeni says follow the flow into gold and base metals
The potential for mutual economic pain is high. Knightley warned that if the US proceeds with tariffs and Europe reciprocates, it would create more economic uncertainty for corporates on both continents. He stated that the US jobs market, which is already showing signs of cooling, could lose further momentum. “There are some real risks here for the US economy and for the European economy as well, and that does, of course, feed through into valuations in both equity markets, bond markets and the dollar too,” Knightley explained.
In this environment of heightened risk, traditional safe-haven assets are behaving unusually. Knightley observed that US Treasuries and the dollar have been selling off, shrinking the pool of reliable safe havens. Gold, as a result, is reaping the benefits. “The pool of so-called safe havens seems to be shrinking, and gold is certainly there,” he said. He contrasted this with assets like Bitcoin, which has also been viewed as a potential safe haven but has continued to fall. Until there is greater clarity on the economic and geopolitical fronts, Knightley sees little to prevent further gains for gold.
For the entire interview, watch the accompanying video
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