‘Messy politics’ are a huge risk for the global markets and economy

The United States and China have called another truce in their trade war. But Mohamed El-Erian, chief economic adviser with Allianz, thinks it would be a mistake to assume that a deal is definitely in the cards.

The Dow soared Tuesday after the Trump administration delayed some tariffs on Chinese goods set to begin on September 1. It now plans to put those tariffs in place on December 15.

But investors don’t yet appreciate what will almost certainly come next: another trade war escalation. Any cease fire between the United States and China will would be short-lived, El-Erian told CNN Business on Tuesday.

“The likelihood is for a further escalation of the China-US tensions and a slow-but-widening process of de-globalization which would test some long-standing conventional wisdoms about international investing,” El-Erian said.

Worldwide turmoil, as evidenced by protests in Hong Kong and the surprising election results in Argentina, are dampening global growth prospects, depressing stock prices, and lowering government bond yields, El-Erian added. For example, he noted that Brexit and concerns about the autonomy of central banks in India and Turkey are all part of a long list of politically induced uncertainties.

“Messy politics is influencing economic and market outcomes,” he said.

El-Erian is particularly worried about how the Federal Reserve will respond to the global market and economic tumoil. The Fed went too far with rate hikes at the end of 2018, El-Erian believes, but he doesn’t think the Fed should go overboard with rate cuts.

“The world’s most powerful central bank is being held hostage by markets that want ever more monetary stimulus,” he said.

Unless other governments take steps to promote economic growth, then more central bank easing will add to the risk of financial instability, but won’t do much to help economies grow, El-Erian added. That would undermine central banks’ credibility and expose them to even more political pressures.

El-Erian will discuss this with CNN International anchor Julia Chatterley on the Markets Now live show Wednesday at 12:45 pm ET.

Chatterley will also be joined by Nancy Tengler, chief investment strategist with Tengler Wealth Management, to talk about Cisco, Starbucks, Disney, Morgan Stanley and other blue chip stocks that she likes.

“Markets Now” streams live from the New York Stock Exchange every Wednesday at 12:45 pm ET. Hosted by CNN Business correspondents, the 15-minute program features incisive commentary from experts.

You can watch “Markets Now” at CNN.com/MarketsNow from your desk or on your phone or tablet. If you can’t catch the show live, check out highlights online and through the Markets Now newsletter, delivered to your inbox every afternoon.

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