Traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) at the closing bell, June 18, 2019 in New York City. U.S. markets surged on Tuesday after President Donald Trump announced that he plans to meet with Chinese President Xi Jinping to discuss a trade deal at next week’s G-20 summit in Japan.

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People in the U.S. farm-belt states know how much their fortunes depend on prompt implementation of the trade deal with China. And so does Wall Street, where the likelihood of the highest investment returns in a decade are riding on a trade truce with America’s biggest trade partner.

Even the Germans are cheering up on the possibility that more balanced U.S.-China trade relations could bring similar improvements in trans-Atlantic commerce to prop up Germany’s stagnating economy. Berlin’s economic strategists think that Washington will have no interest in causing another round of trade problems in an election year.

Germans are also expecting that the U.K. will leave the European Union by the end of next January in a manner that will protect German business interests in a market generating Germany’s second-largest (after the U.S.) merchandise trade surplus. Brexit architects, however, may have other ideas, because they apparently wish to position the U.K. as the EU’s major competitor.

Washington’s extensive use of economic sanctions – a war by other means — is another example of events where markets must reprice assets according to sanctions’ expected effects on sales and profits.

The latest example is a sanctions-driven withdrawal last week of one of the key subcontractors from the construction of the Nord Stream 2 pipeline – a large project which would supply natural gas from Russia to Germany and the rest of the EU. The U.S. sanctions have not only created a big political problem between the U.S. and Germany, but they will also hit bottom lines of the project’s shareholders consisting of large German, Dutch and French companies.

The situation is particularly difficult in cases where crippling economic sanctions also cause dangerous security side effects.

North Korea and Iran are currently the most prominent examples of that. They are also the cases where international community remains deeply divided with regard to the severity and scope of those countries’ curtailed access to world trade and finance.

Sanctions are meant to completely isolate Iran from the world economy. That’s a tough and dangerous mission. Iran is a resource rich country of more than 80 million people, with the world’s second-largest natural gas supplies and control over the sea route handling more than one-quarter of gas and a fifth of oil trade on a global scale.

In addition to controlling such an important choke point for international trade, Iran is also one of the key players in ongoing Middle East conflicts and a suspected seeker of nuclear weapons.

North Korea is a very different and a much more dangerous problem. It is a confirmed nuclear power, with an arsenal of nuclear warheads and an apparently full range of their delivery vehicles. A panoply of UN and unilateral U.S. sanctions is designed to force the country to give up its nuclear weapons under international supervision. The long negotiating process is now stalled because North Korea wants security guarantees and a gradual sanctions removal.

China and Russia support the view that some sanctions should be lifted to get the U.S.-North Korean negotiations going again. The U.S. does not agree, but it seems to be asking China to help in preventing North Korea’s “Christmas gifts” – new nuclear explosions and/or ballistic missile tests.

That now brings China onto a larger U.S. geopolitical platform, where trade imbalances are only one of the issues in the countries’ increasingly hostile strategic competition.

And that’s where things will get tough. During a telephone call last Friday, President Donald Trump was told by China’s President Xi Jinping that Washington was interfering in Beijing’s internal affairs. That is unacceptable to China, but that seems fair game to the U.S. in the name of democracy, rule of law and human rights – all things where China and the West see things differently, and where there is no room even for “transactional cooperation.”

Successful investors have to adjust their portfolio strategy to changing geopolitical landscapes. The booming markets during the current political turmoil in the U.S. is not proof that those events have no meaning for asset prices. No, that simply shows that markets have discounted the expected outcome of a clash between the U.S. House of Representatives and the White House.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

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