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In light of last week’s events surrounding markets and Brexit talk, Rebecca O’Keeffe, Head of Investment at interactive investor comments for Finance Monthly.

There is no doubt that President Trump has been highly positive for US equity markets, which has fed through to rising global markets, but his increasingly erratic behaviour is making it very difficult for investors to work out whether he remains a friend or foe. His America first policy is designed to play well at home, but in classifying the rest of the world as competitors rather than allies, he has increased tensions and raised geopolitical risks for investors.

Bank of America, Blackrock and Netflix all report second quarter earnings today, which may provide further clarity for financials and the outperforming technology sector. Mixed results from three of the big US banks on Friday saw bank stocks fall, so today’s figures from Bank of America should provide further clarity for financials. Technology stocks have been the place to be invested in the first half of the year with the Nasdaq up over 13% compared to relatively flat performance elsewhere. The first of the FANGS to report, Netflix earnings are hugely important for investors to confirm whether the outperformance of technology stocks is warranted or if the market has got ahead of itself.

Calls for a second referendum and a coordinated effort by Brexiteers to undermine Theresa May’s policy and position means this could be a make or break week for the Prime Minister. Having set out a radical plan to seek what she believes is the best possible deal for the UK economy, Theresa May must now try to sell the deal to parliament this week. The hard-line Brexiteers have already indicated their objections, but they could also instigate a direct challenge to May’s leadership if they can secure the 48 Tory MP signatures necessary for a leadership ballot. After months of failed negotiations and an increasingly divisive government, this week is pivotal for Theresa May.

In light of Donald Trump’s dramatic withdrawal from the Iran Nuclear Deal, Katina Hristova examines how the pullout can affect the global economy.

As with anything that he isn’t fond of, US President Donald Trump hasn’t been hiding his feelings towards the Joint Comprehensive Plan of Action between Iran and the five permanent members of The United Nations Security Council plus Germany. Pulling the US out of the agreement on the nuclear programme of Iran, which was signed during Obama's time in office, is something that Trump has been threatening to do since his 2016 election campaign. And he’s only gone and done it. Earlier this month, he announced America’s immediate withdrawal, saying that the US will reimpose sweeping sanctions on Iran’s oil sector and that “Any nation that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States”. And as if this isn’t alarming enough, President Trump has also said that the US will require companies to ‘wind down’ existing contracts with Iran, which currently ranks second in the world in natural gas reserves and fourth in proven crude oil reserve, in either 90 days or 180 days. This would hinder new contracts with Iran, as well as any business operations in the country.

Since Washington’s announcement, signatories of the Iran Nuclear Deal, still committed to the agreement, have embarked on a diplomatic marathon to keep the deal alive. On 25 May, Iran, France, Britain, Germany, China and Russia met in Vienna in a bid to save the agreement.

 

So how will this hurt the global economy?

Deals worth billions of dollars signed by international companies with Iran are currently hanging by a thread. The main concern on a global scale is that the US’ decision threatens to cut off a proportion of the world’s crude oil supply, which has already resulted in an increase in oil prices, with crude topping $70 a barrel for the first time in four years.

Additionally, European companies like Airbus, Total, Renault and Siemens could face fines if they continue doing business with Iran. Royal Dutch Shell, who is investing in the Iranian energy sector, is potentially one of the biggest companies to be affected by Trump’s withdrawal which could put billions of dollars’ worth of trade in jeopardy. As The Guardian points out: “In December 2016, Royal Dutch Shell signed a provisional agreement to develop the Iranian oil and gas fields in South Azadegan, Yadavaran and Kish. While drilling is still a long way off, sanctions are likely to put any preparations already being made on ice.”

French company Total, who’s involved in developing the South Pars field, the world’s largest gas field in Iran, is in a similar situation.

Airbus and Boeing, two of the key players in the international aviation industry, have signed contracts worth $39 billion to sell aircraft to Iran. As The Guardian reports, the most significant deal is an agreement by IranAir to buy 100 aircraft from Airbus.

A spokesman from Airbus said that jobs would not be affected. “Our [order] backlog stands at more than 7,100 aircraft, this translates into some nine years of production at current rates. We’re carefully analysing the announcement and will be evaluating next steps consistent with our internal policies and in full compliance with sanctions and export control regulations. This will take some time”. Rolls Royce is also expected to be indirectly affected if Airbus loses its IranAir order, as the company is the key engines provider to many of those aircraft models.

Another European company that will be hurt by the sanctions announcement is French Renault and PSA, who owns Peugeot, Citroën and Vauxhall. When sanctions were lifted back in 2016, Renault signed a joint venture agreement with the Industrial Development & Renovation Organization of Iran (IDRO) and local vehicle importer Parto Negin Naseh, worth $778 million, to make up to 150,000 cars in Iran every year. This is one of the largest non-oil deals in Iran since sanctions on the country were lifted. Last year, local firm Iran Khodro also signed a deal with the trucks division of Mercedes-Benz, with car production scheduled for this year.

Iranian firm HiWEB has been working alongside Vodafone to modernise the country’s internet infrastructure, but it looks like the partnership will have to be reconsidered.

The consequences

The White House and President Trump appear aware of the danger that a rise in oil prices on an international level pose to the economic growth of the Trump era, however, they also seem ready to embrace the economic and geopolitical challenges that are to follow. Although the consequences of US’ Iran Deal pullout are not perfectly clear in the short term, they will undoubtedly become more visible as sanctions take effect. The deal has its flaws, however, completely withdrawing from it and threatening the US’ closest allies can only compound those issues and create new ones. It is hard to predict what will unfold from here and where Trump’s strategy will take us. The one thing that is certain though is that the world doesn’t need more hostility.

With the ongoing spat between the United States and China, which seems to be only getting uglier, Katina Hristova explores the history of trade wars and the lessons that they teach us.

 

Trade wars date back to, well, the beginning or international trade. From British King William of Orange putting steep tariffs on French wine in 1689 to encourage the British to drink their own alcohol, through to the Boston Tea Party protest when the Sons of Liberty organisation protested the Tea Act of May 10 1773, which allowed the British East India company to sell tea from China in American colonies without paying any taxes – 17th and 18th century saw their fair share of trade related arguments on an international level.

 

Boston Tea Party/Credit:Wikimedia Commons

 

Trade wars were by no means rare in the late 19th century. One of the most infamous examples of a trade conflict that closely relates to Donald Trump’s sense of self-defeating protectionism is the Smoot-Hawley Tariff Act (formally United States Tariff Act of 1930) which raised the US already high tariffs and along with similar measures around the globe helped torpedo world trade and, as economists argue, exacerbated the Great Depression. As a response to US’ protectionism, nations across the globe began striking each other with an-eye-for-an-eye tariffs – countries in Europe put taxes on American goods, which, understandably, slowed trade between the US and Europe. As we all know, the Depression had an impact on virtually every country in the world – resulting in drastic declines in output, widespread unemployment and acute deflation. Even though most countries began to recover between 1932 and 1933, the world was hit by World War II shortly after that. In 1947, once the war was over, the World Trade Organisation (WTO) was established - in an attempt to regulate international trade, strengthen economic development and hopefully, avoid a second global trade war after the one from the 1930s.

 

Schoolchildren line up for free issue of soup and a slice of bread in the Depression/Credit:Flickr 

 

Another more recent analogy from the past that could be applied to the current conflict between two of world’s leading economies, is the so-called ‘Chicken War’ of 1963. The duel between the US and the Common Market began when European countries, feeling endangered by US’ new methods of factory farming, imposed tariffs on US chicken imports. For American poultry farmers, the Common Market tariffs virtually meant that they will lose their rich export market in West Germany and other European regions. Their retaliation? Tariffs targeting European potato farmers, Volkswagen campers and French cognac. 55 years later, as the Financial Times reports, the ‘chicken tax’ on light trucks is still in place, predominantly paid by Asian manufacturers, and has resulted in enduring distortions.

 

 

 

 

 

President Trump may claim that ‘trade wars are good’ and that ‘winning them is easy’, but history seems to indicate otherwise. In fact, a closer look at previous examples of trade conflicts seems to suggest that there are very few winners in this kind of fight.

For now, all we can do is wait and see if Trump’s extreme protectionism and China’s responses to it will destroy the post-World War II trading system and result in a global trade war; hoping that it won’t.

 

 

Protagonist of this week's news, Alexander Nix is the executive at the centre of the Cambridge Analytica and Facebook controversy surrounding political campaign influence, sly data based marketing and supposed behind-our-backs data harvesting through everyone's favourite social media platform.

In this video CEO Today delves in to the life of Alexander Nix, a very private individual, listing some hobbies, interests and much of what he's been up to to get where he is today.

Velshi & Ruhle grade the economy's performance under President Trump.

 By Mihir Kapadia, CEO of Sun Global Investments

 

In November 2016, for most observers, a Donald Trump win was a slightly worrying possibility and a Hillary Clinton victory seemed to be the best route for economic continuity and stability.  But then the unexpected happened; Trump won the Presidential Election and the market rallied strongly from the next morning onwards.  

 This optimism continued as Trump’s inauguration approached, with markets anticipating the sweeping economic reforms promised by his campaign.  In the market, this was christened the ‘Trump Trade’, and over half a year since President Trump took office, some of the optimism seems to be showing signs of fading.

Markets were apprehensive mainly because Trump seemed to be an unknown political factor and a threat to the established order.  Some people feared a similar panic to the one that swept global markets in the aftermath of the BREXIT vote.

However, with hindsight, Trump’s ascent represented a great investment opportunity for investors. His economic policies emphasised large scale infrastructure investment, significant reforms and a large stimulus which is likely in aggregate to be positive for economic growth and activity.

Trump exhibited a more conciliatory tone towards Janet Yellen and the Federal Reserve, compared with the more hostile rhetoric of the campaign.  This emphasised continuity and stability and reassured the markets further.

The dollar surged to new heights and the situation seemed promising for investors who had hoped to see progress in the US economy by an administration that would not be mired in a political stalemate.  Trump achieved a Republican majority in both houses, a fact which in theory increased his chances of pushing through his legislative agenda.  Compared with the Obama administration which often faced a hostile and partisan Congress, the Trump administration seemed to represent a more decisive direction for the US economy with pro-growth policies and promises of tax cuts and deregulation.

These factors ensured some progress for the US dollar and for US assets.  However, some more troubling questions have arisen about the administration in more recent days.  It has been argued that campaign promises have not materialised, and in some cases, such as the President’s tough stance on China, these seem to have reversed altogether. In addition, the numerous scandals and controversy to have hit the White House since January have led to questions as to whether the Trump administration will be competent enough to deliver on their economic agenda.

One key event was the release of US first quarter GDP figures that showed the slowest growth in years.  Although it is still early days for the Trump administration, it was viewed by some as indicating the failure of the Trump administration to boost the economy. On this view, despite the promises of tax reform and infrastructure investment, few if any of Trump’s economic policies seem no closer to fruition than they did before the election. It is this which seems to have cooled investor optimism. However, this is not the complete picture - while the US dollar has declined in 2017, US Stocks (especially the NASDAQ) have powered away and are at new all-time highs at the time of writing.

During the campaign Trump criticised the Fed for its policy of keeping interest rates low. Whilst Trump’s opinion on interest rates has varied, he has argued for a lower dollar which many see to be somewhat inconsistent with lower interest rates. Whilst the Fed has raised interest rates once this year, with officials indicating that two or three more interest rate increases were on the way, recent events have seen interest rates on hold and the likelihood of more rises this year is again under question.

Many controversies have pervaded Trump’s time in office; this did not seem to affect markets much until a flare-up of the James Comey – FBI issue which eventually rattled the stock markets and the US dollar. This soon evolved into a larger ongoing investigation into the administration’s links with Russia.

Foreign policy has also proven fraught with uncertainty, with the latest economic sanctions on Russia straining relations with the allies in the EU. Both US and European businesses have expressed concerns over the prospect of being penalised by the very same sanctions aimed at punishing Russia, due to the amount of partnerships and contributions involved. For investors, some of the allure of Trump during his time in office would appear to have faded for the time being.

However, Trump’s time in office has seen a very different story unfold within emerging markets, with its biggest loser being Mexico. The key effect was Trump’s controversial policy for a border wall between USA and Mexico for tackling illegal immigration.

Upon Trump’s victory the Mexican Peso crashed to record lows, with more details of the President’s plan hurting the emerging market’s economy – and relations with the US, further.  The threat to use remittances as a tool to fund the wall, amongst other ideas, also served to threaten other Central American economies.

However over half a year since Trump’s inauguration the markets tell a very different story. The Mexican peso has become one of the world’s best performing emerging market currencies, rallying to a 14-month high since January after Trump took office. After the volatility seen at the beginning of the year, the peso has seen far more positive movement over the first seven months of Trump’s presidency. This positive sentiment has boosted other risky assets including Emerging Market Assets.

In conclusion, the Trump Presidency presented an opportunity for a resurgent US economy with comparisons made early with President Reagan’s time in office. Half a year later, Trump’s presidency has proven to be tumultuous, subverting expectations for some and confirming them for others. Although US stocks and emerging markets have gained strength, global risks for investors have also risen under the turbulent Trump administration. If this is taken as a sign of things to come, it is likely that investors will see more volatility over the next 4 years.

 

Written by Mihir Kapadia, CEO and Founder of Sun Global Investments

Over the last month, there has been strong optimism on US stocks due to Donald Trump’s infrastructure plans and spending proposals, or what is termed the “Trump trade” pushing up the prices in the markets and the financial sectors. To some extent, this is business as usual as Republican presidents are often greeted with a stock market rally. This generally lasts about 6 weeks before a re-assessment is usually made.

In purely economic terms, there are two broad strands to Donald Trump’s policies. On the domestic front, he is focused on government policies and regulations which pose as obstacles to business, including high taxes. His policies are to generally move towards a more deregulatory environment and remove certain rules which are considered impediments to business, according to his campaign. He is also expected to overhaul the tax system with motives to both simplify the system and overall reduce taxes. This is a positive development for business and for securities (both Debt and Equity) issued by companies. This is also a leading explanation for why the stock markets in the US have been cynically rising since November 8th when Trump’s victory was confirmed.

On the external front, the general economic policy stance has been nationalistic and protectionist. The new administration had advocated a lot of such policies during the campaign. These included promising action against countries such as Japan and China (and later Germany), which were accused of being currency manipulators and were allegedly using a deliberately low value of the currency to boost their exports. Trump promised higher tariffs and taxes against countries and companies which are found to be offending on these matters.

The President believes the only way the US can drive inward investments is by discouraging importers with higher tariffs, in an effort to tip the scales which are currently in favour of countries such as China. These comments also reflect the President’s aversion towards the cheap Chinese goods and services which are flooding the US consumer market, and largely undercutting US businesses – something he promised to tackle as part of his election manifesto.

It is no secret that the US is facing a trade deficit, but any protectionist measures could easily backfire and could initiate retaliatory actions against the US, especially from China. It would also adversely affect the US, sending its currency spiralling down, push up inflation and potentially destabilise global markets. This will also discourage foreign investors from investing in US assets which would be quite against US’s interests.

If Trump goes ahead with his electoral promises of creating infrastructure and investment boost, it should boost investor confidence; push the US treasury bonds and likely the dollar upwards, something he seems to be less wary of, especially since the currency value is too high for international comfort, while others such as the Yuan seem overvalued. These comments sparked concerns that the new President may engage against the long-standing US policies. To tackle trade deficit, he needs a weaker dollar; and if he can put flesh to the bones on his promised economic policies, he is going to make the dollar stronger. It’s a forked road, and if he will choose the path less trodden is a question yet to be addressed. Then again, for Trump, it’s always been the path less trodden which brought him to the White House in the first place.

For countries like Mexico and some others, he has threatened strict controls on immigration, and the movement of capital from the US into these countries. For example, he has criticised US companies which make investments in Mexico, which has already led to companies reconsidering strategy and reassessing their yearly business plans.

As for the emerging markets, they may be enticed to look beyond the USA for investments under the current climate. China and Japan suffer from severe overcapacity where in existing investments are not generating sufficient returns. A trade war is not exactly the best of international developments that would make one invest in China. The uncertainty created by the Trump-machine has generated poor visibility and until this lifts off, it is hard to assess the way of flows. The trade policy outlook of Mr Trump is definitely a risk factor and in addition to the hawkish Federal Reserve and commodity prices, could be perilous for emerging market investments. However, it should be noted that investors are always seeking performance, even though non-economic drivers appear to be leading – at the end of the day the performance is what truly matters. Looking at emerging markets we can say that India, Brazil, Indonesia are stabilizing, growth-focused economies – this is a narrative investors can buy into.

It is also possible that Emerging Markets such as South Asia or Africa may benefit from investment inflows. Similarly, Russia and Iran may also see inflows but only if issues relating to sanctions are resolved. Nevertheless, the political actions such as travel bans and free movement restrictions will also tend to have some impact on the business front. Companies which face the brunt may lobby or protest to make amends. So far, the optimism in emerging markets has been immense, lest any of Trump’s emerging market-unfriendly campaign proposals make it onto the policy agenda, emerging markets would certainly suffer.

It remains to be seen how much of the protectionist and anti-mercantilist campaign promises will be translated into real policies. So far, the new President’s stance towards China and Japan has been more conciliatory than the campaign rhetoric might have led one to expect. In the case of Japan, Prime Minister Abe is reported to have emphasised the number of Japanese companies which have created manufacturing jobs in the USA. This could be the rationale for Trump’s policy – threaten countries and companies unless they can show a track record of investing and manufacturing in the USA. It can also be effective as Ford has boosted its manufacturing investment in the USA and moved against expanding in Mexico.

There is definitely some hard work ahead.

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