New figures released by the United States Department of Labor on Thursday revealed that 1.3 million people filed for unemployment benefits in the past week – 50,000 more than the expected 1.25 million.
Coinciding with a spike of 75,000 coronavirus cases in the US, the highest single-day increase yet recorded, the disappointing unemployment statistics had a knock-on effect on investor enthusiasm that soon became visible in the markets. The Dow and S&P both opened down 0.7%, and the Nasdaq saw a loss of 1.1%.
“The mild risk-off tone to the start of the US session is keeping stocks in the red after a softer European session,” commented Neil Wilson, remarking that the prominence of US unemployment figures “cast a shadow” over global markets.
Outside the US, surprising slides were also seen in prominent Asian markets, with a fall of 4.5% in the Shanghai Composite, 5.3% in the Shenzen Component and 1.6% in the Hong Kong Hang Seng. After reports emerged of better-than-expected Chinese GDP, indicating an 11.5% month-on-month increase in economic output in June, these stock market tumbles were especially jarring.
Even less-affected European markets still saw a decline, with a 0.3% slip recorded in both the FTSE 100 and the DAX and a drop of 0.4% in the CAC 40 by the afternoon.
Detsche Bank strategist Jim Reid commented on Friday that the Chinese markets’ loss could be attributed to a 1.8% dip in June retail sales, adding that a recent jump in confirmed COVID-19 cases in the region “seems to also be acting as an overhang.”
Factory data released by Beijing has shown signs that the Chinese government’s push to restart the economy has seen some early results. The National Bureau of Statistics found that China’s industrial production increased by 3.9% in April, its first rise since the beginning of the year. The increase beat even analysts’ projected rise of 1.5%.
Following the figures’ release, early Friday trading saw European stocks buoyed. France’s CAC 40 rose by 1%, Germany’s DAX by 1.3%, and London’s FTSE 100 by 1.3%. The pan-European STOXX 600 index saw an increase of 1.2%.
US futures also showed signs of improving, with the S&P 500 and Dow Jones Industrial Average futures rising by more than 0.3% each, and Nasdaq by 0.5%.
These positive signs were later reversed, however, as it emerged that the US government intends to block microchip shipments to Chinese telecommunications giant Huawei, a move likely to escalate tensions between the two countries. As a consequence, the S&P 500 and the DOW slipped by 1.1%, with Nasdaq ending 1.4% in the red.
China’s own stock indexes saw little change, with the Shanghai composite finishing 0.07% down. Elsewhere in Asia, South Korea’s Kospi rose by 0.12% and Japan’s Nikkei by 0.62%, apparently undisturbed by China’s industrial growth or trade tensions.
Nigel Green, Founder and CEO of deVere Group, has warned that coronavirus, paired with the heightening geopolitical and trade tensions, could drive the world to the brink of a global recession this year. He said: “Investors have largely been caught off-guard by the serious and far-reaching economic consequence of the coronavirus. This, despite major multinational organisations already lowering their profit guidances, and many more likely to do so in coming weeks. Clearly, this will hit global supply chains, economies across the world and ultimately government coffers too.
“However, it does seem that the world is waking up to the reality of the situation as the containment of coronavirus hasn’t yet materialised and confirmed cases soar in different countries. Until such time as governments pump liquidity into the markets and coronavirus cases peak, markets will be jittery triggering sell-offs”, Mr Green notes.
Investors around the world must take action if they want to safeguard their wealth in the current volatile environment and they must take precaution about the stocks they want to put their money in as the coronavirus outbreak is disrupting the supply chains of many companies.
Here is Finance Monthly’s list of the top 5 stocks that are likely to weather the storm, which will hopefully help you with handling your portfolio in light of the coronavirus news.
McDonald’s
You can find McDonald’s signature golden arches in over 100 countries across five continents. It is one of the biggest and most recognisable fast-food chains in the world. Thanks to its unique franchising structure and low prices, McDonald’s is one of these companies that will thrive in any economic condition.
With over four decades of consecutive annual dividend increases, McDonald's is a Dividend Aristocrat[1] - it has issued dividends every year since 1976. In the last few years, it has repurchased the shares at a meaningful rate which has boosted the earnings per share and has supported the stock price.
Although the fast-food chain had to temporarily shut over 300 restaurants in China in January (which is only about 1% of its China stores), due to fears about the coronavirus outbreak, China accounts for only 2% of McDonald’s earnings. McDonald’s stock has doubled since 2015 and has shown no signs of slowing down, even with the coronavirus out there.
Facebook is one of the best and most safe stocks to buy on coronavirus fears. Although shares have taken a hit, investors should remain focused on the long term, valuing stocks based on fundamentals.
Facebook is one of the few companies that have no exposure in China, where the outbreak is the worst, as the social media platform is blocked there. On top of this, there are no signs that minimal outbreak in other countries has resulted in weaker digital ad spending, however, investors should keep an eye out for any commentary from Facebook’s management on whether or not the virus is having a material impact on the social network.
When taking the current low-interest-rate environment, it is also worth noting that Facebook is a growth stock, and growth stocks tend to perform very well in low-interest-rate environments.
The stock was also cheap before the coronavirus selloff, so all in all, FB stock could provide investors with a high-quality, big-growth company with minimal coronavirus exposure.
According to Jeremy Bowman:[2] “Facebook is also highly profitable and sitting on $54 billion in cash and equivalents, giving the company plenty of resilience against an extended disruption. The stock is trading at a P/E ratio of 21 based on adjusted earnings and backing out its cash sum. Considering its growth rate, the stock already looks like a bargain. If shares keep falling, it will be a downright steal.”
Even people who haven’t been affected by the coronavirus are becoming more and more health-conscious, trying to take precautionary measures through buying products like hand-wash, wipes, sanitisers, disinfectants, etc.
Johnson & Johnson
Currently in its tenth year of economic expansion, Johnson & Johnson’s stock has a reputation as a safe haven. Despite a slight dip in the stock however, it seems like its future will be bright.
Professor Kass from the University of Maryland[3] is bullish on healthcare stocks due to the amount of money that people are expected to spend on healthcare in the upcoming months, thanks to the coronavirus outbreak.
Kass commented: “… several stocks that are currently under the radar for this possible epidemic should do very well as healthcare spending in the years ahead is likely to increase substantially”.
The rationale behind this is super straightforward – Johnson & Johnson sells a wide range of everyday healthcare products to millions of people across the globe. Even people who haven’t been affected by the coronavirus are becoming more and more health-conscious, trying to take precautionary measures through buying products like hand-wash, wipes, sanitisers, disinfectants, etc. At the time of writing this, pharmacies and drug stores in the UK have run out of hand sanitisers due to popular demand. Johnson & Johnson is therefore expected to “continue experiencing rapid growth in revenues and earnings in the foreseeable future,” says Professor Kass.
Thus if anything, the virus’ outbreak could create a long-term positive effect on the Johnson & Johnson stock.
Apple
Thanks to the coronavirus outbreak, global technology giant Apple has been hit hard from multiple angles, with having to temporarily close all corporate offices, stores and contact centres in Mainland China, and suppliers being ordered to reduce or halt production. This was all followed by a 5% drop in Apple’s stock on 31st January, however, Apple will be perfectly fine and remains a stock worth investing in. Yahoo Finance believes that[4] the App Store will get a big boost during the outbreak due to the hundreds of millions of Chinese consumers being stuck at home right now, who will be looking for ways to entertain themselves. Additionally, February doesn’t tend to be a big month for iPhone sales as it is. The company relies heavily on its new iPhone launch in September and by then, coronavirus will be in the past (hopefully).
Apple’s stock remains loved by most investors and will undoubtedly weather the coronavirus storm. Once that’s over, with the release of its 5G iPhone, the tech giant is expected to see huge growth in the last few months of the year.
More and more people choose to not leave their houses amid coronavirus fears across the globe, which means that technology companies that serve consumers at home, such as Netflix, could come out as a winner from the coronavirus outbreak.
Netflix
Despite the tumble in the broader market averages, Netflix stock, along with other home entertainment stocks have been less affected. Netflix stock has made somewhat of a comeback after a solid run in 2018 – it has seen an increase in stock value of some 40% since September. On the stock market [5] on Thursday 27th February, the video streaming provider fell 2% to 371.71 after spending most of the session in positive territory.
Raymond James analyst Justin Patterson commented[6]: "We believe Netflix is in a unique position to benefit from 1) a solid content lineup; 2) normalisation of competitive landscape; 3) increased consumer time spent indoors". It makes perfect senses - more and more people choose to not leave their houses amid coronavirus fears across the globe, which means that technology companies that serve consumers at home, such as Netflix, could come out as a winner from the coronavirus outbreak.
Netflix stock ranks number 15 on the IBD 50 list[7] of top-performing growth stocks.
[1] https://www.fool.com/investing/2019/11/19/why-its-time-to-buy-mcdonalds-stock.aspx
[2] https://www.fool.com/investing/2020/02/25/3-stocks-im-buying-if-the-coronavirus-selloff-gets.aspx
[3] https://finance.yahoo.com/news/7-u-stocks-buy-coronavirus-195612724.html
[4] https://finance.yahoo.com/news/7-u-stocks-buy-coronavirus-195612724.html
[5] https://www.investors.com/market-trend/stock-market-today/stock-market-today-market-trends-best-stocks-buy-watch/
[6] https://www.investors.com/news/technology/click/netflix-stock-home-entertainment-stocks-safe-coronavirus/
[7] https://research.investors.com/stock-lists/ibd-50/
Enabled by the state, China’s technology companies have been able to influence consumer technology adoption in a much more homogenous way than in the West. Its digital payment system, powered by Alipay and WeChat Pay, is almost universal as a result. Even small roadside stalls routinely use digital wallets. A visitor to China soon realises that, back here in the West, we are still incredibly analogue.
What’s more, Alipay is beginning to move beyond its Chinese borders. With a projected 250m active users by March 2020, the Indian population is actively engaging with Paytm (part-owned by Alipay), despite an often fractious relationship between the two nations.
China has managed to be nimble with its digital payments innovation and adoption despite or maybe because of its intervention. In the West, democracies take a long time to agree governance and regulation. Individual companies are making forays but there’s still a lack of cohesion. There’s also huge barriers thanks to a lack of trust - just look at the scepticism over Facebook’s digital currency, Libra, many of whose key partners have abandoned the scheme.
The West is going to need to find a way of building its own cashless framework soon. If it can’t, consumers will gravitate to whatever is available. It's not about where the technology is developed, it’s about making people’s lives easier. If a technology or business provides a way to reduce friction in someone’s life, then consumers will adopt that technology. Also, payment systems are as much about the trust and ecosystem in which they operate as they are about the technology. Increasingly, the rest of the world is starting to see that 1.2 billion people can’t be wrong.
China has managed to be nimble with its digital payments innovation and adoption despite or maybe because of its intervention.
The imperative to develop an answer to Alipay and WeChat Pay goes beyond national pride – the rapid growth of a universal, digital, cashless payment alternative has the potential to supplant national currencies themselves. Even the US has acknowledged this - with Federal Reserve Chair Jerome Powell calling Facebook’s work on Libra a ‘wake-up’ call to the importance of digital currency.
A little history: in terms of the threat to the dollar, the traditional currency system has been previously pegged to the gold reserves. In the Nixon and Reagan eras, they removed the dollar peg to the gold reserves. As a result, now it is not pegged to anything. The relationship between the dollar and gold was disconnected.
When that happened the dollar rose in status - it became the reserve currency for every country in the world. Even China has an estimated $2 trillion held as a reserve, because of its universal recognition around the world and the fact that banking systems are controlled by the West. This, in turn, gives the US a lot of benefits - as long as people hold the dollar, the currency is stable. In a cashless society where the currency is digital, those reserves held around the world will be less meaningful as digital reinvents the global monetary system.
While Alipay is certainly powerful in its domestic market, it has not quite reached the status of a currency, although critically it is tied to the existing Chinese currency infrastructure. It follows that technology has the potential to disrupt the idea of national currency.
I am not predicting that this disruption is just around the corner but it’s clear that as more consumers experience more forms of digital payments, they will increasingly migrate to digital currencies. The West needs a cashless payment mechanism and we can’t assume that we can hold customers back until we’re ready. It is the law of numbers. It is about the ecosystem these numbers create. You attract people by making the experience as frictionless and connected as possible. Then these people will bring more people.
Delving into the latest impacts of Donald Trump’s impeachment trials on investors around the world, Wael-Al-Nahedh, CEO at Spearvest, gives us a rundown on the influence of global politics and the volatility of investment in 2020.
After three years of failed negotiations, sharp words, a prime ministerial resignation and a Christmas general election, at long last the UK government has a clear majority and the overall decision on the country’s future relationship with the European Union (EU) has been agreed. On top of this, China and the US trade deal tensions seem to be simmering down and global markets can look forward into what we all hope will be an extended period of global market stability. Meanwhile the ongoing stand-off between Iran and the world’s biggest economy appears to have quietened down, at least for the moment.
What’s more, in December 2019 and after months of speculation, the world watched as Donald Trump became only the third president of the United States history to be impeached, only to be swiftly acquitted, as was expected to happen given the Republican majority in the Senate.
However, as recent events in Wuhan, China have proven, major challenges can appear suddenly and without warning. The fast-spreading Coronavirus in Wuhan has already had a substantial impact on the Chinese economy. This crisis has led to fears around international travel and public health emergencies, in turn damaging supply chains and knocking investor confidence just as it was starting to bounce back.
This was a reminder that repercussions from local risks can have a global impact on financial markets. Specifically, what are the current challenges and how can investors navigate these situations?
Financial Markets throughout election year
All eyes will be on the US election this year, and many investors will tread cautiously in the US stock market depending on updates and promises in policy, and polling predictions when it comes to the people’s favourite candidate.
In the short term, the election can affect corporate confidence due to Trump’s business-friendly policies, such as his reform on corporate tax, could be at risk of being replaced by more topical economically viable policy.
In the short term, the election can affect corporate confidence due to Trump’s business-friendly policies, such as his reform on corporate tax, could be at risk of being replaced by more topical economically viable policy.
Alternatively, we might see certain sectors flourish from now until election day, as trade deals are renegotiated or tariffs on foreign goods are imposed or revoked. It was announced this week that China will halve tariffs on some US imports as it moves quickly to implement its ‘phase one’ trade deal.
History dictates that election years often offer prosperity when it comes to the stock market, regardless of who is eventually elected. In fact, when examining the return of the S&P 500 Index for each of the 23 election years since 1928, only four have been negative.
US-Iranian tension
US and Iran haven’t had the best of relations for a few decades now, and US sanctions on Iran’s oil exports last year had already crippled the Iranian economy. And, to see the new year in, tensions flared as a US-led drone strike killed General Qasem Soleimani in Baghdad.
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On January 10th, Trump announced sanctions that went beyond oil and gas and now targeted construction, mining, manufacturing and textile goods. As a result, trade with Iran is flatlining worldwide and investors, companies and lenders should do well to avoid any partnership or investment with Iranian goods or businesses, such as the recently blacklisted, Mahan Air.
On the other hand, market impact hasn’t been as severe as one might have initially expected. Oil prices are still below the level they hit in September 2-19 after the Saudi Aramco oil attack.
The situation in China
The most significant impact on the global economy has emerged as a result of a Global Health Crisis, as a new strain of Coronavirus has all but isolated China from the rest of the world. The true impact on the economy resulting of this terrible human tragedy, is as yet unknown.
Short-term impact on the stock market in China has correlated to the global significance of this devastating virus: stock markets in china saw their biggest fall in five years as traders rushed to sell-off Asian equites amid continued fears about the impact of the Coronavirus on the global economy. Investors should keep a keen eye on the spread of this virus, as we could see it affect international markets quite severely should the number of cases of infection increase dramatically in key markets such as the US or Germany, for example.
The virus has also had a substantial impact on oil markets, with prices declining sharply as demand from China dissipates through diminished air travel, road transportation and manufacturing. Given the fact that China under normal circumstances consumes 13 of every 100 barrels of oil the world produces, we can expect the impact on oil markets to further increase should this global health crisis widen.
If not contained, retail sales and travel could suffer consequently in the next few months, especially as industrial production struggles to recover after last year’s extended slump and the consequences of the US-China trade war, which has already cut Chinese economic growth to its lowest level in 29 years.
How to navigate challenges
Such episodes of global nervousness often - counter-intuitively - represent considerable opportunity for those investors who are willing to buy when others are selling. Attractive opportunities typically arise in times of high volatility, which brings to attention the importance of relying on independent and unbiased advice before deciding to invest at a time of great global economic and political uncertainty.
Some of the highest returns in global markets often happen around periods of high volatility in an unpredictable fashion, and that is why thorough planning and a long time horizon give investors a great advantage. Over 10 years, equities have earned excess returns over cash 95% of the time. The return of a buy-and-hold investor in the S&P 500 over the past 20 years has been more than 220%, versus just 42% for someone who sold at each new all-time high and waited for a 5% pullback to reinvest.
Finally, one should always diversify an investment portfolio adding into low-correlated investments, include income-generating hard assets (like real estate), invest with a long-term horizon, and of course increase the understanding of risks.
With its strong influence on the multilateral trading system, the US is undoubtedly amongst the most powerful countries in the world when it comes to trade. Over the course of his presidency, Trump’s “America First” policy, however, has increasingly been undermining international trade laws. Over the past few years, the US president has been fighting numerous battles with some of America’s trading partners, using tariffs for leverage in negotiations. And although it may look like he’s done a lot, has this led to any progress? Let’s take a look at the main measures that Mr Trump has taken to protect American trade over the past four years.
The US vs. China trade war
The trade war with China which President Trump announced in 2018 is the most prominent trade conflict we’ve witnessed in recent years. The US President has been accusing China of unfair trading practices and intellectual property theft for years, whilst China has long believed that the US is attempting to curb its rise as an economic powerhouse.
The dispute has seen the two countries impose tariffs on hundreds of billions of dollars worth of one another's goods and although they recently signed a preliminary deal[1], some of the most complex issues remain unresolved and most of the tariffs are still in place. The US will maintain levies of up to 25% of approximately $360bn worth of Chinese products, whilst China is anticipated to keep tariffs on over $100bn of US goods.
United States-Mexico-Canada Agreement (USMCA)
Back in 2018, the US, Canada and Mexico signed a successor to The North American Free Trade Agreement (Nafta) which was renamed as the United States-Mexico-Canada Agreement or USMCA. The agreement governs over $1.1 trillion worth of trade between the three North American countries.
Renegotiating Nafta was one of Trump’s key goals for his presidency. "The terrible NAFTA will soon be gone. The USMCA will be fantastic for all!", he tweeted shortly after signing the new deal with America’s neighbouring countries.
However, despite the name change and the claims that the updated agreement would "change the trade landscape forever", a lot of the terms have remained the same[2]. Stronger labour provisions and tougher rules on the sourcing of auto parts were some of the most notable changes, however, analysts believe that their significance remains to be seen.
What’s more, a number of the other updates were discussed during negotiations which took place before Trump took office.
Tariffs on European cheese, wine & aircraft
There hasn’t been a trade deal agreed with the Europan Union as of yet. In 2018, after the US introduced tariffs of 25% on steel and 10% on aluminium imported into the country, the two sides went through a round of tit-for-tat tariffs with the EU announcing retaliatory tariffs on US goods such as bourbon whiskey, motorcycles and orange juice. A few months later, in October, the US imposed a new round of tariffs[3] on $7.5bn of EU goods, including French wine, Italian cheese and Scotch whisky. The US also imposed a 10% levy on EU-made airplanes which could hurt US airlines that have ordered billions of dollars of Airbus aircraft.
President Donald Trump has also repeatedly threatened to impose additional tariffs on European cars and although that hasn’t materialised yet, he has confirmed that he’s serious about it when he recently mentioned his plans again[4] during the World Economic Forum in Davos.
Trade deals with South Korea & Japan
One of Trump’s first moves as President of the US was to withdraw the country from the Trans-Pacific Partnership (TPP) – a proposed trade agreement between 12 countries, which eventually went ahead without America. Since then, Mr Trump has claimed two bilateral agreements with South Korea[5] and Japan[6]. However, the changes were so limited that Congressional researchers concluded that they barely qualified as trade deals.
With Japan, the US agreed on either levy cuts or full elimination on $7bn worth of agricultural goods, which is what it would have received under the Trans-Pacific Partnership too.
The most notable win that came from the agreement with South Korea is the extension of the 25% US tariffs against South Korean light-duty trucks to 2041. Previously, it was scheduled to expire in 2021.
Tariffs on steel and aluminium from Brazil and Argentina
In December last year, Mr Trump surprisingly announced on Twitter that he’s ‘restoring’ tariffs on steel and aluminium imports from Brazil and Argentina.
The two South American nations have been exempted from higher duty on both metals, but according to President Trump, both countries had been devaluating their currencies which he believes is ‘not good’ for American farmers.
There hasn’t been much progress since the initial announcement, but Brazil’s President Jair Bolsonaro said he had been assured by Trump that the tariffs won’t materialise.
[1] https://www.bbc.co.uk/news/business-51114425
[2] https://markets.businessinsider.com/news/stocks/us-canada-mexico-trade-deal-usmca-nafta-details-dairy-auto-dispute-resolution-2018-10-1027579947
[3] https://www.independent.co.uk/news/business/news/us-tariffs-trump-eu-goods-airbus-subsidies-wto-a9132001.html
[4] https://www.marketwatch.com/story/trump-doubles-down-on-threats-to-impose-tariffs-on-european-cars-at-davos-2020-01-21
[5] https://www.cnbc.com/2018/09/24/trump-signs-revised-trade-deal-with-south-korea.html
[6]https://www.bbc.co.uk/news/business-49834705
The comments from Nigel Green, chief executive of deVere Group, come after China fuelled hopes that a deal can be reached to end its trade war with the US after agreeing with Washington to roll back on some tariffs.
The deal to reduce trade tensions could encourage the International Monetary Fund (IMF) to revise up global growth forecasts next year.
Mr Green notes: “There has been an argument that in regard to the trade war, China was holding out, playing the long game and waiting for President Trump to leave office, before dealing with another administration.
“Whilst this argument might have held water before, I now believe this is not the case – and it is what is fueling recent developments in the trade war negotiations.”
He continues: “It is likely that China is currently fueling hopes to reach a phased agreement in the trade dispute with the U.S. and cancel tariffs as soon as possible because it will help President Trump’s re-election.
“His re-election would suit them for two major reasons.
“First, because they will assume that reaching a deal with Trump to end the damaging trade war will probably be easier than with some others. These include Elizabeth Warren, the potential Democratic rival, who could, say many supporters, win next year’s presidential election.
“Ms Warren can be expected to be even tougher with China than Trump, and not only on trade, but on other difficult issues, including climate change and human and labor rights.
“And second, despite the trade war, Trump’s policies and rhetoric have proven to be strategically helpful to China in achieving its longer-term goals.
“In many respects, President Trump has undermined Washington’s global credibility, international governance bodies and key alliances, and has been indifferent if not antagonistic towards major trading agreements.
“This all compromises America’s standing as the world’s primary superpower and it provides China with openings and opportunities it has previously never had in terms of global influence and setting international trade conventions.”
The deVere CEO concludes: “The positive signs coming from Beijing and Washington on the trade talks between the world’s two largest economies have been welcomed by stock markets – some reaching all-time highs this week.
“Investors’ exuberance will grow further still should the deal be cemented, and also should Trump be re-elected.
“However, US investors should perhaps also question whether Mr Trump’s administration has, in fact, handed China a great strategic opportunity that could damage America’s preeminent superpower status in the longer-term and, therefore, its economic dominance.”
That possibility has pushed many government bond yields to new lows in recent weeks, while global equity prices have been volatile. Below Rhys Herbert, Senior Economist, Lloyds Bank Commercial Banking looks at the evidence.
And while some economic data might be confusing, I think there is a clear message.
First, that global economic growth has slowed and may slow further, and second, that there is a pronounced difference between weak or even falling activity in the manufacturing sector and still relatively buoyant service sector.
So, what might be causing this?
Manufacturing v services
It seems probable that the manufacturing sector is being hurt by the ongoing trade dispute between the US and China. Indeed, the US manufacturing sector is now in decline for the first time in a decade.
And the Bank of England (BOE) flagged last week that, because the trade war between the US and China had intensified over the summer, the outlook for global growth has weakened.
The Bank’s Monetary Policy Committee added that the trade war was having a material negative impact on global business investment too.
The main impact is on confidence - or more accurately lack of confidence – which is holding manufacturers back from investing. As a result, we’ve seen a slowdown in world trade and in demand for manufactured goods.
In contrast, demand for services is being supported by relatively buoyant consumer spending. Yes, consumers are probably reluctant to splash out on big ticket items like cars right now, but overall, they are still willing to spend.
Consumers are probably reluctant to splash out on big ticket items like cars right now, but overall, they are still willing to spend.
The central conundrum
The key question going forward is whether it is more likely that manufacturing rebounds or that service weaken from here?
That is the conundrum that central banks need to weigh up in setting policy.
So far, the majority have decided that they are sufficiently concerned about the downside risks to take out some insurance and adopt policies designed to support economic growth.
Back in July, the US Federal Reserve did something it had not done for over a decade. It reduced interest rates – by a quarter point to 2.25% (upper bound).
It was widely seen as an insurance move against increasing global economic headwinds, emanating mainly from the US-China trade dispute.
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It repeated the move last month, lowering the target range for its key interest rate by 25 points to between 1.75% and 2%. The accompanying statement repeated July’s message that, while economic conditions are probably sound, a bit of insurance against downside risk was advisable.
Meanwhile, in his penultimate meeting in September, this month, European Central Bank President Mario Draghi announced a package of stimulus measures including a reduction in its deposit rate to a record low of -0.5% and the introduction of a two-tier system to exempt part of banks’ excess liquidity from negative rates.
He also announced a resumption of the bond-buying programme at €20bn a month from November and, importantly, signalled no end date to purchases.
Draghi can argue that the weak Eurozone PMI suggests the economy is stagnating, supporting this action.
But the UK has not followed this strategy.
On the sidelines
The BOE is still wary enough about potential inflationary pressures from a tight labour market and rising wage growth to talk about the possibility of interest rates needing to go up.
But last month, the BOE concluded that the longer that uncertainty goes on, the more likely it is that growth will slow, especially given the weak global economy.
We will see if the message changes, but the likelihood is that BOE rate setters will want to continue to remain on the sidelines and keep rates unchanged at 0.75%, not least because the Brexit outcome remains unsettled.
The government’s official preferred Brexit position is for a deal and that assumption in the Bank’s forecast points to interest rates rising “at a gradual pace and to a limited extent”.
But the BOE also noted growing concerns about risks to growth, joining the US Federal Reserve and the European Central Bank, which both seem to have decided that risks are skewed to the downside.
But, while escalating tariff wars, slowing growth in the US and China and Brexit uncertainty mean there are credible reasons to worry that 10 years of steady expansion could be coming to an end, it is still far from certain that the current slowdown means a recession is looming.
The VIX volatility index – which is commonly used to gauge the fear level among investors – jumped by 36%, leading the markets to become particularly volatile. Losses have been widespread. In the week of the 5th of August alone, the NASDAQ plunged 3.5%, the S&P 500 and Dow Jones both dropped 3%, the FTSE 100 fell by 2.5% and both the French CAC 40 and German DAX 30 saw decreases of around 2%.
With neither side willing to be the first to blink, investors are increasingly seeking out ways to properly insulate themselves from the instability of the market. However, given the unpredictability of the conflict itself, this is no simple task. So, to help you make the best decisions that you can, here André Lavold, CEO of Skilling, takes a look at what has gone on and how some key stakeholders have reacted.
The present state of play: tariffs, tweets and devaluations
Under this current American administration, trade conflicts are never truly resolved; instead being defined by periods of escalation and détente. May saw the US choose to increase the levels of tariffs on $200 billion of Chinese goods, to which the Chinese responded by raising tariffs of its own on $60 billion of US goods. At the G20 summit in Osaka, both sides publicly agreed to a ‘truce’, however this was almost immediately reneged upon by the Americans after the President tweeted that he would levy an additional tariff of 10% on $300 billion of Chinese goods.
This brings us to the current state of play. While the US and China have always treated each other in an adversarial fashion, the latest measures have escalated the conflict to a new level of significance. The latest round of tariffs, most of which will be introduced in the autumn and winter of this year, now focus on consumer-facing goods like electronics and clothing. Companies with significant exposure to China – such as Nike and Apple, who saw their stock prices fall by 3% and 5.2% respectively – were especially affected. With importers likely to pass on the price rise to consumers, these new measures will likely negatively impact consumer spending. With the US household being the backbone of the American economy, the odds of a severe economic slowdown or recession are increased.
Companies with significant exposure to China – such as Nike and Apple, who saw their stock prices fall by 3% and 5.2% respectively – were especially affected.
Knowing that this was likely to hurt its export-reliant economy, the Chinese took action. The People’s Bank took the strategic decision to allow the Yuan to depreciate below the seven per dollar rate for the first time since 2008. Being a floor that the Chinese Government had vigorously defended in past, many have suggested that this was a retaliation against the latest round of tariffs. While it’s only possible to speculate on whether this was indeed retaliation, there would be scores of evidence to suggest so. The positive current account balance which China maintains with the US means that its own tariffs are not as effectual as those implemented by the United States. However, by letting the Yuan weaken, this not only reduces the price of Chinese exports but also reduces the profit of American companies with operations in China.
Spillover: has a trade war become a currency war?
Having considered China’s actions as combative, the United States took the historic decision of labelling China as a currency manipulator; the first time it had done so since the Clinton administration in 1994. The President has also previously attacked the Federal Reserve for not choosing to cut interest rates, stating that this has led to an appreciation in the value of the dollar; making American organisations uncompetitive on the global market.
His rhetoric, combined with the greater chances of a global economic slowdown, suggests that a devaluation in the dollar could be forthcoming. A tough business environment would vastly increase the likelihood of intervention – be it quantitative easing, or lower interest rates – and this would result in the dollar losing value.
With both sides now flirting with the idea of a currency ‘race to the bottom’, this could develop into a very dangerous game of chicken.
With both sides now flirting with the idea of a currency ‘race to the bottom’, this could develop into a very dangerous game of chicken. While China has much to gain from a devaluation, it also has much to lose. Let the currency slide too far, and there is a great risk of capital flight. Similarly, as previously mentioned, given that the US retains a trade deficit of approximately $488 billion, it will be hard to let the dollar fall without impacting its own businesses.
The ultimate effect of this will be volatility in the currency markets, especially in the USDCNY pair, and for traders, this can create lots of opportunities.
Wider reactions
With such unpredictable market forces at play, currencies and commodities that are considered ‘safe havens’ such as the Japanese Yen, the Swiss Franc and Gold have seen rises, as traders look for ways to protect their earnings. As long as the market remains volatile, they will continue to be good prospects. However, with the Japanese economy also being very reliant upon exports, traders should be wary of potential intervention.
The conflict has also led to lower oil prices, as doubts have been expressed in the general economic climate. This has impacted commodity currencies such as the Canadian Dollar and Norwegian Krona. The Australian Dollar has been doubly impacted as, in addition to being relatively reliant on natural resource exports, its economy is also uniquely exposed to the Chinese market.
Given the present impasse, it’s becoming increasingly likely that the trade war will not cease for some time. With both sides willing to dig their heels in, it may take a governmental change for the situation to develop any further. However, in the meantime, there are steps that you can take to protect your earnings. Minimise the risk of loss by auditing your portfolio and making sure that you’re comfortable with its allocation. By doing so, you ensure that you continue to earn at your fullest potential.
The company that owns Hong Kong's main stock exchange, Hong Kong Exchanges and Clearing, has made a surprise £32bn bid to buy it’s London rival and counterpart, the London Stock Exchange.
The Hong Kong company said in a statement that it hoped combining the two exchanges would result in the creation of "the largest and most significant financial centres in Asia and Europe."
Shares in the London Stock Exchange Group rose by more than 11% as the news broke, but the initial flurry cooled and fell back as the financial world adjusted to the news.
The bid marks a bold move for Hong Kong Exchanges and Clearing, as it comes just after the LSE's £22 billion ($27 billion) deal to acquire financial data company Refinitiv; a deal the London Stock Exchange is hoping transforms it into a global markets and information powerhouse with the express aim of competing with rival Michael Bloomberg's financial data empire. However, the bid from HKXCF is reported to be dependent on the LSE scrapping its plans to buy Refinitiv.
Charles Li, Chief Executive of the Hong Kong company expressed his desire for the deal to come to fruition, and proclaimed the deal would "redefine global capital markets for decades to come. Together, we will connect East and West, be more diversified and we will be able to offer customers greater innovation, risk management and trading opportunities."
Following the bid, the London Stock Exchange confirmed it had received what it described as an "unsolicited, preliminary and highly conditional" offer from Hong Kong Exchanges and Clearing and released a statement adding that "the board ... will consider this proposal and will make a further announcement in due course".
Analysts have described the deal as a potential “non-starter,” highlighting the London Stock Exchange share price staying well below the offer price as a sign that investors aren’t confident in the deals chances of success.
Some have noted that political factors may come into play in what will be seen as the first real test for a post-Brexit Britain and how, without the EU, it’s high value financial services industry could become fair game. In the past the EU have blocked mergers between the LSE and it’s rivals including one in 2017 which would have resulted in a merger between the London Stock Exchange and Germany’s Deutsche Boerse.
As the political battleground in the UK is played out around the perceived independence Brexit is designed to deliver, this could be a huge reason for the bid to fail. Neil Wilson, an analyst at Markets.com told the BBC: "The UK government may not wish to see such a vital symbol of UK financial services strength, and indeed a strategic asset, to be owned by foreigners. Effectively it would hand it over to the Chinese through the Hong Kong back door."
The London Stock Exchange seems to be committed to its original plan, stating it would be continuing with its own proposed acquisition of Refinitiv.
Nigel Green, the chief executive of deVere Group, which has $12bn under advisement, is speaking out after Beijing announced on Friday it will impose new tariffs on $75 billion worth of US goods and resume duties on American autos.
The Chinese State Council said it will slap tariffs ranging from 5 to 10% in two batches. The first on 1 September and the second on 15 December.
Mr Green notes: “China and the US are playing a dangerous game of brinkmanship which will inevitably dent global growth at a time when the global economy is headed for a serious downturn.
“Both sides are getting hurt by the ongoing tit-for-tat trade war and given that they’re the world’s two largest economies its negative impact is far-reaching and intensifying. There’s some serious collateral damage.
“It is likely that there will be further retaliations in the form of tariffs, punitive sanctions on each other’s nation’s firms and, possibly, currency devaluations.”
He continues: “The already volatile markets have been rattled again by today’s news. Investors are getting spooked.
“However, the trade war will likely prove a blip for long-term investors.
“Indeed, investors should embrace some volatility as important buying opportunities.
“Fluctuations can cause panic-selling and mis-pricing. Sought-after stocks can then become cheaper, meaning investors can top up their portfolios and/or take advantage of lower entry points. This all typically results in better returns.
“A good fund manager will help investors seek out the opportunities that turbulence creates and mitigate potential risks as and when they are presented.
The deVere CEO concludes: “Many savvy investors will be using the fall-out of the US-China trade war to generate and build their wealth.”
Trump vs. China
Back in 1930, the US introduced the Smoot-Hawley Tariff Act, which raised their already high tariffs, triggering a currency war and, as economists argue, exacerbating the Great Depression. With President Donald Trump’s threat to put 10% tariffs on the remaining $300 billion of Chinese imports that aren’t subject to his existing levies, sending markets tumbling from Asia to Europe, the question on everyone’s lips is: Is history about to repeat itself?
In August, in a bid to hit back against Trump’s administration, Beijing allowed the Chinese yuan to plummet past the symbolically important $7 mark. Economists suggest that this currency manipulation is China’s attempt to display dominance and gain the upper hand in the trade war between the two countries as devaluating its currency could help counteract the effects of US’s long list of tariffs on Chinese goods.
As protectionist actions escalate and US-China relations continue deteriorating, investors and markets have been growing increasingly concerned even though Trump has delayed the imposition of his new tariffs until December. A full-blown trade war wouldn’t be good news to anyone and could seriously weaken the global economy, as the IMF has warned, making the world “poorer and more dangerous place”. Both sides are expected to experience losses in economic welfare, while countries on the sidelines could experience collateral damage. Furthermore, if tariffs remain in place, losses in economic output would be permanent, as distorted price signals would prevent the specialisation that maximises global productivity. The one thing that’s certain, no matter how things pan out, is that there will be no winners in this war.
Economists suggest that this currency manipulation is China’s attempt to display dominance and gain the upper hand in the trade war between the two countries as devaluating its currency could help counteract the effects of US’s long list of tariffs on Chinese goods.
Cyberattacks & data fraud
Millions, if not billions, of people’s data has been affected by numerous data breaches in the past couple of years, whilst cyberattacks on both public and private businesses and institutions are becoming a more and more frequent occurrence. With the deepening integration of digital technologies into every aspect of our lives and the dependency we have on them, cybercrime is one of the greatest threats to every company in the world.
Cyberattacks are rapidly increasing in size, sophistication and cost, as cybercrime and data breaches can trigger extensive losses. In 2016, Cybersecurity Ventures predicted that cybercrime will cost the world $6 trillion annually by 2021, up from $3 trillion in 2015. According to them, ”this represents the greatest transfer of economic wealth in history, risks the incentives for innovation and investment, and will be more profitable than the global trade of all major illegal drugs combined”.
Emerging Markets crisis
Since the early 1990s, emerging markets have been a key part of investors’ portfolios, as they have been offering strong returns and faster growth. However, global trade tensions, a stronger US dollar and rising interest rates have hit emerging markets hard. Still far from catching up with the developed world, many supposedly emerging markets are developing at a slower pace, which combined with the threat of a global trade war and higher borrowing costs on the rise, has made investors pull in their horns. Emerging markets are the ones feeling the strain and financial panic has been gripping some of the world’s developing economies.
With political instability, external imbalances and poor policymaking which has led to full-blown currency crises in the two nations, Turkey and Argentina have been at the centre of an emerging market sell-off last year. But they are not the only emerging economies faced with a currency crisis – according to the EIU, some economies which are already in the danger zone and could suffer from the same currency volatility include Brazil, Mexico and South Africa.
Still far from catching up with the developed world, many supposedly emerging markets are developing at a slower pace, which combined with the threat of a global trade war and higher borrowing costs on the rise, has made investors pull in their horns.
If the currency crises in Turkey and Argentina continue and develop into banking crises, analysts predict that investors could abandon emerging markets across the globe. “Market sentiment remains fragile, and pressure on emerging markets as a group could re-emerge if market risk appetite deteriorates further than we currently expect”, the EIU explains.
Climate crisis
In recent months, the media is constantly flooded with reports on the horrifying environmental risks that the climate crisis the Earth is in the midst of poses, but we’re also only starting to come to grips with the potential economic effects that may come with it.
Despite the significant degrees of uncertainty, results of numerous analyses and research vary widely. A US government report from November 2018 raised the prospect that a warmer planet could mean a big hit to GDP. The Stern Review, presented to the British Government in 2006, suggests that this could happen because of climate-related costs such as dealing with increased extreme weather events and stresses to low-lying areas due to sea level rises. These could include the following scenarios:
- Decrease in agricultural areas crop yields due to hotter weather and draught.
- Rebuilding roads that have been destroyed by flooding caused by rising seas and more frequent hurricanes.
- Having to build more efficient power grids because the existing ones are not able to withstand extreme weather conditions.
Due to climate change, low-lying, flood-prone areas are currently at a high risk of becoming uninhabitable, or at least uninsurable. Numerous industries across numerous locations could cease to exist and the map of global agriculture is expected to shift. In an attempt to adapt, people might begin moving to areas which will be affected by a warmer climate in a more favourable way.
A US government report from November 2018 raised the prospect that a warmer planet could mean a big hit to GDP.
All in all, the economic implications of the greatest environmental threat humanity has ever faced range from massive shifts in geography, demographics and technology – with each one affecting the other.
Brexit
Fears that the UK could be on the brink of its first recession in 10 years have been growing after figures showed a 0.2% contraction in the country’s economy between April and June 2019. A weakening global economy and high levels of uncertainty mean the UK’s economic activity was already lagging, but the potential of a no-deal Brexit and the general uncertainty surrounding the UK’s departure from the EU, running down on stock built up before the original 29th March departure date, falling foreign investment and car plant shutdowns have resulted in its GDP decreasing by 0.2% in Q2. This is the first fall in quarterly GDP the country has seen in six and a half years and as the new deadline (31st October) approaches, economists are concerned that it could lead to a second successive quarter of negative growth – which is the dictionary definition of recession.
And whilst the implications of Brexit are mainly expected to be felt in the country itself, the whole Brexit process displays the risks that can come from economic and political fragmentation, illustrating what awaits in an increasingly fractured global economy, e.g. less efficient economic interactions, complicated cross-border financial flows and less resilience and agility. As Mohamed El-Erian explains: “in this context, costly self-insurance will come to replace some of the current system’s pooled-insurance mechanisms. And it will be much harder to maintain global norms and standards, let alone pursue international policy harmonisation and coordination”. Additionally, he goes on to note that tax and regulatory arbitrage are likely to become more common, whilst economy policymaking could become a tool for addressing national security concerns.
“Lastly, there will also be a change in how countries seek to structure their economies”, El-Erian continues. “In the past, Britain and other countries prided themselves as “small open economies” that could leverage their domestic advantages through shrewd and efficient links with Europe and the rest of the world. But now, being a large and relatively closed economy might start to seem more attractive. And for countries that do not have that option – such as smaller economies in east Asia – tightly knit regional blocs might provide a serviceable alternative.”
