Major Changes Looming for Financial Markets
This weekend I am travelling, but I would like to share the key takeaways from yesterday’s Global Financial Markets report.
Developments over recent weeks involving Venezuela, Greenland, Iran, Cuba, and Colombia point to profound shifts in the geopolitical and monetary landscape. These events are unlikely to be isolated incidents; rather, they appear to be early signals of structural changes that are likely to have a significant impact on financial markets in the years ahead.
History shows that periods in which a dominant superpower risks losing its leading position are often accompanied by large-scale conflict. A similar situation now appears to be emerging.
Following World War II, an international order was established under U.S. leadership, based on laws, rules, and multilateral institutions. Conflicts were no longer meant to be resolved militarily, but through legal and institutional frameworks. The United States acted as both the dominant power and the enforcer of this order, ensuring compliance with international agreements and rulings by multilateral organizations.
That position is weakening. China is rapidly closing the gap with the United States and has already gained a lead in certain strategic areas. Moreover, China controls critical raw materials and—crucially—the processing capacity for these resources, such as rare earth elements. This is likely to give China considerable leverage over the global economy for many years to come.
More importantly, countries such as China and Russia increasingly feel less bound by international rules. The principle that “might makes right” is becoming more prevalent. While the U.S. remains the strongest military power for now, its dominance has clearly diminished due to China’s rapid rise. As a result, the U.S. is finding it increasingly difficult to compel China and other countries to adhere to international agreements.
It appears that this new reality has now fully registered in Washington. Policymakers recognize that U.S. strategy must be adjusted to prevent a further relative shift of power toward China.
A large-scale conventional war is unlikely, not least due to the deterrent effect of nuclear weapons. Instead, confrontation is increasingly taking place through economic, technological, and monetary instruments such as sanctions, trade restrictions, payment systems, and control over commodities.
In the monetary domain, the United States wields significant power due to the dominant role of the dollar, U.S. Treasuries, and its control over the international payment system. At the same time, China and Europe are gradually seeking to reduce their dependence on this system.
Declining foreign demand for dollars and Treasuries poses a risk to the U.S., as it could lead to higher interest rates, a weaker dollar, and financing challenges amid large budget deficits.
President Trump is attempting to manage these risks by exerting greater influence over the Federal Reserve. This is creating tensions within the political system of checks and balances and raising concerns about the independence of both the Fed and the rule of law.
Three Major Uncertainties
For investors, the environment remains characterized by significant uncertainty. First, there is the question of how the situations in Venezuela and Iran will evolve. These developments could have major implications for oil prices. While there is currently a structural surplus of oil, escalation—particularly involving Iran—could rapidly reverse this situation.
Second, uncertainty surrounds Greenland. Should this issue result in a fundamental rift within NATO, it would dramatically alter the geopolitical landscape and have far-reaching consequences for financial markets.
A third critical uncertainty concerns the relationship between President Trump and the Federal Reserve. Will Trump continue his efforts to exert greater influence over the Fed, and if so, to what extent? If pressure intensifies further, there is a risk that large foreign investors may gradually reduce their exposure to the United States. This would weaken the dollar while simultaneously pushing U.S. interest rates higher.
Beyond these geopolitical factors, there is a fundamental economic uncertainty: the outlook for productivity growth. Productivity growth has been remarkably strong in recent quarters. The key question is whether this reflects a structural impact from artificial intelligence, or merely a temporary rebound following the exceptionally weak productivity growth seen in previous quarters.
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