Politics, Prices, and Global Economy

Global markets are shifting direction. Capital is moving toward cheaper European equities. China is producing more at lower prices. Japan is drawing both migrants and investors. The United States faces a weaker labour market despite political claims of strength. 

Politics and economics interact, and investors are rotating away from familiar positions.

United States: Jobs Stall, Tariffs Spread

The U.S. economy added only 22,000 jobs in August. Hiring in blue-collar industries has slowed sharply, despite Trump’s promise to revive them. Tariffs have raised costs and reduced investment rather than boosting employment.

The administration has pressured allies into making large U.S. investment pledges to avoid tariffs. Japan committed $550bn, while South Korea and the EU followed with their own promises.

After the European Commission fined Google €2.95bn for its advertising practices, Trump threatened new tariffs. Digital regulation is becoming a trade issue, adding to existing disputes.

Job growth has stalled, and trade policy is creating uncertainty for companies. Investors are diversifying out of U.S. equities and into Europe.

Europe: Banks Push Indices Higher, Steel Struggles

Germany’s fiscal package and rising defence spending have drawn investors into European markets. But the strongest equity returns this year are in southern Europe. Indices in Italy, Spain, Greece, and Portugal trade at much lower valuations than Germany or France.

Growth numbers support this trend. In the second quarter, Greece’s GDP grew 1.7% year on year, while Germany’s fell 0.3%. Budget deficits in Italy, Spain, and Portugal have narrowed, and their banks have rebuilt capital.

Banks account for 50% of Italy’s FTSE MIB and 44% of Athens’ main index, compared with 8.6% in the Stoxx 600 and 5.4% in Germany’s DAX. With European bank shares at their highest levels since 2008, these markets have outperformed.

Banks’ net interest income has improved, and low starting valuations encouraged investors. However, risks remain. Faster ECB rate cuts would compress margins, and renewed sovereign stress could raise bank funding costs.

Steelmakers are under pressure from cheap Chinese imports and Trump’s 50% tariffs, which risk diverting more metal into Europe. Eurofer reports 18,000 job losses in 2024, adding to 90,000 since 2008.

The European Commission promises a new safeguard regime this month, but details are missing. Earlier 25% duties have already been relaxed.

France is an outlier. Political turmoil is damaging markets. Prime Minister François Bayrou faces a confidence vote he is likely to lose. French bond yields have climbed to 3.6%, raising borrowing costs across the economy. Equity performance has suffered as a result.

Europe’s rally is led by bank-heavy indices in the south. Steel shows the limits of industrial resilience. France remains a drag due to political instability.

China: Output Grows, Margins Shrink

China has built an industrial system on an unmatched scale. It produces one-third of the world’s manufactured goods and leads in clean technology, high-voltage transmission, and 5G.

Margin trading has reached Rmb 2.29tn ($321bn), above the 2015 peak that preceded a market crash.

The export-price index has fallen 15% since 2022, while export volumes have risen. China is selling more goods at lower prices, keeping factories running but squeezing profits.

Cheap exports increase deflationary pressure abroad but also raise the risk of new anti-dumping measures.

Expansion has relied on heavy borrowing and has left a large ecological footprint.

These outcomes are structural. Local officials are rewarded for hitting output targets, not for efficiency. Credit is often mispriced. The result is technological achievement alongside chronic overcapacity.

China will continue to supply global markets, but profitability is under pressure. High leverage makes corrections sharper when sentiment turns.

Japan: Political Instability?

A weak yen has made Japanese assets cheap in foreign currency terms. Japan also remains attractive for skilled migrants and investors seeking stability.

Politics has unsettled Japan’s image as a safe haven. Prime Minister Shigeru Ishiba announced his resignation. Ishiba had rising approval ratings among voters but little support inside his fractured party. The LDP, dominant since 1955, is divided over how to handle inflation, demographic decline, and security challenges.

Markets will watch whether the LDP produces a unifying figure or a weakened leader. Institutions remain stable, but political turnover is a reminder that Japan’s safe-haven status depends on governance as well as economics.

Japan is attracting capital and people, but Ishiba’s fall shows political cohesion is still necessary to sustain that role.

Energy: Opec+ Shifts Strategy

Opec+ has announced another output increase for October, adding 137,000 barrels a day to supply. The group has already restored 2.5mn b/d this year, unwinding cuts first imposed in 2022.

Saudi Arabia’s strategy has changed. Instead of holding out for higher prices, it is now focused on regaining market share and lifting revenues by maximising output.

So far prices have held. Brent closed at $65.50 a barrel on September 5, down slightly on the day but still above April’s low of $58. Seasonal demand and sanctions on Russia and Iran have helped. Yet, traders already expect a surplus later this year. The decision risks accelerating that glut.

Riyadh is prioritising market share over price stability. That shift may cap oil prices.

Security & Russia: War Costs Climb

Russia launched its largest drone and missile attack on Ukraine since the invasion began, firing over 800 drones and more than a dozen missiles.

Russia’s economy is weakening. Energy revenues fell 20% year on year between January and August. Russia’s seven-month budget deficit (January–August) stood at 2.2% of GDP, which already exceeds the full-year target deficit of 1.7%.GDP growth is projected at 1.4% for 2025, far below 2024’s 4.3%.

Spending on the war has nearly doubled since 2022, forcing cuts elsewhere. Banks are reporting rising bad loans, and labour shortages are intensifying.

Russia is escalating militarily while absorbing growing economic costs.

Credibility is the scarce resource

Across regions, the same pattern emerges: politics drives economic outcomes.

In the U.S., tariffs and weak job creation are undermining growth.

In Europe, banks deliver returns while steel cuts jobs, and France’s politics unsettle investors.

In China, industrial capacity expands but margins and debt sustainability are weak.

In Japan, inflows continue, but political turnover clouds stability.

In energy markets, Opec+ has abandoned price defence for market share.

In Russia, record drone strikes coincide with an economy sliding into stagnation.

Industrial or fiscal strength cannot be sustained without credible policy.