I’d been looking forward to writing this piece for Finance Monthly; putting the bits together to present a positive outlook for US Stocks that would drive global indices higher. My first draft was about a trifecta of election, pandemic and trade developments that would come together to multiply trade, boost markets, and stabilise politics. There were a number of likely winners - and I wasn’t simply going to present a rotation of tech stocks into “fundamental” equity names.
That isn’t what you are going to get. I’m afraid you are not getting that bullish note. Mr Donald J. Trump is leaving us with a parting gift; the one we most feared – chronic political mayhem. And that fundamentally changes the outlook for US investments.
I was going to start with the Election. It was going to be a simple toss-up: Joe Biden winning the Presidency and Senate, or Biden winning the Presidency and Republicans holding the Senate. A blue wave would have caused some market concerns on spending and policy, but traders would take heart from the prospects for infrastructure spending. As the GOP held the Senate I was initially enthusiastic that gridlock would constrain Democrat excesses, balanced by Post-Trump cooperation in House and Senate.
I was then going to overlay the election with the news on the pandemic front: how the vaccines would allow reopening of the troubled sectors of the global economy, the likelihood of a tidal wave of repressed spending by US consumers – who have saved their way through the crisis – and the prospects for a v-trajectory post pandemic recovery accelerating the economy into a momentum-driven longer growth phase.
And then there were all the global trade possibilities flowing from the end of the contentious Trump era. Not only would tensions with China ratchet down, but the primacy of America’s Nato and East Asian alliances would be reaffirmed and enhanced.
It was all looking kind of positive. Silly me.
Since the results started trickling through on election night there has been an implicit assumption that whatever Trump says and does, it will still end up fine. Fine is a very dangerous word and unreliable ally. Process will be followed, and Biden will become President on 20th January 2021. That’s practically 99% nailed on. Practically does not equate with definitely.
Trump is never going to go easy. He’s been planning his revenge since he realised he would lose the election on postal votes months ago. He intends to remain front and centre in US politics – based on the narrative it’s a “stolen” election. Whatever we conclude about Trump – he is not stupid and he’s a narcissist. That’s critically important in determining where markets go from here – he is likely to remain present, noisy and influential for at least the next four years.
An extraordinary number of Americans sincerely believe the lies and falsehoods Trump and his minions have been spreading to undermine the election. Trump’s narcissism means he cares nothing for the damage that will ultimately do to the economy, the dollar and America’s standing abroad. He cares about the picture: if Trump gets just 10% of his followers down a road to a cold civil war, ahead of the next election cycle, then the result will be a dystopian USA.
It doesn’t matter that Trump lost every single court case, or that Rudy Giuliani looked an incompetent clown at press conferences. It matters not that Trump sacked the head of the US agency charged with ensuring the veracity of the vote. It doesn’t even matter that senior Republicans like Mitt Romney have said Trump is undermining democracy.
Trump doesn’t care about peripheral damage. He wants the negativity to escalate. He will happily use the last few days of his presidency to cause as much destabilisation as possible: denial of the transition process, the sacking of officials, the rush to appoint unsuitable candidates, threatening a cascade of deliberately negative initiatives and troop reductions which will trigger global implications and heighten long-term geopolitical threats. He’s even willing to threaten markets; triggering a rift between the Treasury and the Fed, and spooking investment flows as the independence of the Fed is again tested.
The result will be mayhem right through to 20th January. Trump will ensure his place in history – and he still intends to be writing it.
The rest of the world is looking on in shocked horror. That the “home” of democracy, the nation that’s been lecturing the world on the sanctity of the ballot box, is so conflicted it’s staggering. Fair and swift election results are critical to sustain confidence in democracy. The US election authorities agree – they say there is no evidence of widespread fraud and the election is perhaps the most closely observed in history.
As a result, Trust and Credibility in the US is in serious danger. The positive expectations for trade negotiations have slipped – isolationism looks increasingly likely. That could prove the ultimate perversity – Trump made his identification of China as the major threat the cornerstone of his policy. Yet now, the prospects for a global investment pivot away from the US and into China look higher than ever.
As the US falters over the next four years of market and political angst, investors will vote with their feet and move. A House Divided Against Itself Can Not Stand. Until we see just how the new administration copes with the troubles ahead, I am really struggling to see anything to be positive when considering our investment horizons re the US at present.
Let’s review this in January.
On Friday, President Trump signed into law the largest-ever US economic stimulus package, worth $2 trillion and aimed at shoring up the country’s industries and medical infrastructure as the coronavirus (COVID-19) pandemic continues to spread.
Touting the package as “twice as large” as any other in American history, the President stated that it would bring “urgent relief to our nation’s families, workers, and businesses”.
The bi-partisan bill includes grants to healthcare providers worth $100 billion, with a further 20% increase in Medicare payments for treating patients who have contracted COVID-19.
Additionally, the bill will seek to deliver one-time payments of $1,200 to every American citizen earning under $75,000 a year, and an additional $500 dollars per child. Provisions for freelancers and workers in the “gig economy” have been added to the unemployment benefits programme, bolstering the fortunes of workers not normally covered.
The bill also creates a $500 billion lending programme for industries, and even cities and states, that have been worst affected by the pandemic. Treasury Secretary Steven Mnuchin will control the dissemination of this fund.
While amendments to the bill have ordered an inspector general to oversee Mr Mnuchin’s use of this lending programme, President Trump signalled in a signing statement that the White House will reject requests for information coming from the watchdog.
Aside from this half-trillion-dollar programme, a further $58 billion has been set aside specifically to provide grants to airlines, encouraging them to retain their staff and continue to pay wages amid a significant decrease in demand for air travel.
Last week saw 3.3 million Americans filing for unemployment, a record high.
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.
[ymal]
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 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.
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.”
The analysis from the CEO of the deVere Group comes as investors piled into the Bitcoin and other cryptocurrencies this week amid growing trade tensions between the US and China.
The Chinese renminbi fell to under 7 to the US dollar on Monday – the lowest in more than a decade – igniting drops in stocks and emerging market currencies and driving a rally in government bonds.
Nigel Green, chief executive and founder of deVere Group, notes: “The world’s largest cryptocurrency, Bitcoin, jumped 10% as global stocks were rocked by the devaluation of China’s yuan as the trade war with the US intensifies.
“This is not a coincidence. It reveals that consensus is growing that Bitcoin is becoming a flight-to-safety asset during times of market uncertainty.
“Bitcoin is currently realising its reputation as a form of digital gold. Up to now, gold has been known as the ultimate safe-haven asset, but Bitcoin - which shares its key characteristics of being a store of value and scarcity – could potentially dethrone gold in the future as the world becomes increasingly digitalised.”
He continues: “With the Trump administration now officially labelling China a currency manipulator, escalating the tensions between the world’s two largest currencies economies, investors are set to continue to pile in to decentralized, non-sovereign, secure currencies, such as Bitcoin to protect them from the turmoil taking place in traditional markets.
“The legitimate risks posed by the continuing trade dispute, China’s currency devaluation and other geopolitical issues, such as Brexit and its far-reaching associated challenges, will lead an increasing number of institutional and retail investors to diversify their portfolios and hedge against those risks by investing in crypto assets.
“This will drive the price of Bitcoin and other cryptocurrencies higher. Under the current circumstances, I believe the Bitcoin price could hit $15,000 within weeks.”
The deVere CEO concludes: “Cryptocurrencies are now almost universally regarded as the future of money – but what has become clear this week is that they are increasingly regarded a safe haven in the present.”
In light of recent reports, David Jones, Chief Market Strategist at Capital.com here comments on the impact of the meeting between President Trump and President Putin, and the US quarterly earnings season, on the financial markets.
At the start of the trading week, politics remains in focus for many markets. Last week saw President Trump visit the UK and today he meets with Russia's President Putin. Apparently, there is no formal agenda for the meeting but of course given both personalities involved here there is always the possibility of surprise which could have an impact on markets.
The end of last week saw a very strong finish for stock markets - in the USA the broader S&P500 index finished at its best levels in more than five months. The question now is whether there is enough momentum left to challenge the all-time high set in January of this year. There's plenty of news-flow for stock markets this week as the US quarterly earnings season continues with the likes of Netflix, Goldman Sachs, eBay and Microsoft all reporting. For the UK, the state of the High Street remains under focus with the latest retail sales due out on Thursday. The latest UK retailer under pressure is department store Debenhams with the weekend press reporting that its credit insurers were tightening terms. The share price of Debenhams has lost more than 50% of its value so far this year.
Last week was relatively quiet one for major currency markets. The pound continues to swing on various political resignations and utterings from the UK government but is broadly unchanged over the past three weeks. It's a big week for UK economic data with the latest unemployment numbers released on Tuesday and inflation on Wednesday - the CPI reading is expected to show 2.5%. It could well mean more volatility for the pound in the days ahead.
The price of oil continues to flip-flop around the $70/barrel mark. Although this has recently set three-year highs, it has been somewhat directionless in recent weeks. Perhaps there is something from today's Trump/Putin meeting that will inspire traders to pick a side and set up a more meaningful push here.
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.
Trump’s escalation of the trade war is going to trigger a “chain reaction of negative events around the world,” says Nigel Green, the founder and CEO of deVere Group.
This warning comes as global markets are in turmoil as Donald Trump’s administration announced a long list of new products that tariffs on $200 billion worth of goods from China will be levied against.
Mr Green comments: “Trump’s escalation of the trade war between the world’s two largest economies is going to trigger a chain reaction of negative events around the world.
“It is going to lead to higher inflation in the U.S, as import tariffs raise the cost of imported goods while domestic producers find that they can increase their prices as foreign competition weakens. This means interest rates will be hiked and the dollar will go up.”
He explains: “China’s cheap goods have helped keep prices, and therefore US and global inflation, low.
“To counteract increasing inflation, the US Federal Reserve is even more likely to raise interest rates. A jump in rates will, of course, strengthen the dollar.
“A stronger dollar also increases stress in emerging markets, many of which have borrowed heavily in recent years in dollars and who now find interest and capital repayments on these loans have shot up in local currency terms. In addition, emerging markets are particularly vulnerable to a downturn in exports resulting from a rise in quotas and import by the US, given that exports are a key driver of growth for many under-developed countries with China the most obvious example’.
Mr Green goes on to say: “Trump’s trade war is a masterclass in self harm for the US and global economy.”
The deVere CEO stated last week that investors must now avoid complacency and ensure their portfolios are properly diversified to mitigate risks and take advantage of potential opportunities that all bouts of market volatility bring.
He said: “Investors need to brace themselves for months of heightened posturing from the different parties, which is likely to increase market turbulence.
“And as Trump potentially marches off to a trade war, a good fund manager will help investors sidestep the risks and embrace potential opportunities.”
(Source: deVere group)
Refugee crisis, political turbulences, economic struggles brought on by austerity and Brexit. Katina Hristova explores the crisis that the European Union has found itself in.
"The fragility of the EU is increasing. The cracks are growing in size”, warns EU Commission Chief Jean-Claude Juncker. With Italy’s Government crisis finally being resolved and the country’s shocking rejection of NGO migrant rescue boats, it has been easy to detract from the political earthquake that the third largest EU economy experienced and the quick impact that it had on the Euro. But Europe’s problems go deeper than Italy’s political turbulences. A month ago, Spain, the fourth biggest Eurozone economy, was faced with a very similar crisis and even though the country now has a new leader, analysts believe that the Spanish instability is not over yet. With the shockwaves of both countries’ political uncertainty being felt on Eurozone markets, on top of migration pitting southern Europe against the north and as the UK marches on towards Brexit whilst Trump abandons the Iran Nuclear Deal, which could mean the end of the transatlantic alliance between the US and Europe, is the EU in serious trouble?
Why is it so serious?
Billionaire Investor George Soros is one of those people that can sense when social change is needed and when the current cultural and political processes are about to collapse. A month ago, in a speech at the European Council on Foreign Relations, Soros claimed that: “for the past decade, everything that could go wrong has gone wrong”, believing that the European Union is already in the midst of an ‘existential crisis’. The post-2008 policy of economic austerity, or reducing a country’s deficits at any cost, created a conflict between Germany and Greece and worsened the relationship between wealthy and struggling EU nations, creating two classes – debtors and creditors. Greece and other debtor nations had sluggish economies and high unemployment rates, struggling to meet the conditions their creditors set, which resulted in resentment on both sides toward the European Union. Back in 2012, the European countries that struggled with immense debt, malfunctioning banks and constant budget deficits and needed help from other member countries were Portugal, Ireland, Greece and Spain. In order to help them the creditors countries set conditions that the debtors were expected to meet, but struggled to do so. And as Soros points out: “This created a relationship that was neither voluntary nor equal – the very opposite of the credo on which the EU was based”.
Although Italy finally has a government, after nearly three months without one, the financial markets are apprehensive about what to expect next, considering the country’s €2.1 trillion debt and inflexible labour market. On 29 May, fearing the political crisis in the country, the Euro EURUSD, +0.6570% slid to a six-month low, whilst European stocks ended sharply lower, with Italy’s FTSE MIB I945, +1.43% ending 2.7% lower, building on the previous week’s sharp losses. Bill Adams, senior international economist at PNC believes that: “The situation serves as a reminder that political risk in the Euro area hasn’t gone away. Italy is not on an irrevocable road to anything at this point,” he said. “I think what is most likely is another election later this year, and what we’ve learned is that outcomes of elections are very unpredictable.”
Spain on the other hand has made huge progress since being on ‘EU life support’ when ‘its banks were sinking and ratings agencies valued its debt at a notch above junk, on a par with Azerbaijan’. Since receiving help, the country’s economy has been growing, unemployment is not as high and its credit rating has been restored. However, with the Catalonia separatism, and the parties, Podemos and Ciudadanos who have emerged to challenge the old duopoly between the Popular Party (PP) and the Socialists, the political uncertainty in the country is set to continue.
Greece has been in a permanent state of crisis for a decade now, with its current debt of 180% of its gross domestic product (in comparison, Italy's is 133%). In less than two months, on 20 August, the country is due to exit its intensive care administered by the European Central Bank and International Monetary Fund. The EU will then have to come up with a new debt relief offer on the $280 billion Greece still owes – which could be challenging, as the ‘creditors’ are not in a charitable mood.
In contrast, Poland and Hungary are financially stable, however, both countries seem to be in opposition to the EU with regards to immigration, the independence of the judiciary, ‘democratic values’ and freedom of the press. Both governments have dismissed EU plans to share the burden that the Mediterranean region carries in terms of migrants arriving into these countries. In addition to this, Hungary’s Prime Minister is promoting an ‘illiberal’ alternative to European consensus, whilst Poland has sided with the US and against its European partners on a range of subjects, including the Iran sanctions and Russian gas pipelines.
And of course, let’s not forget the EU’s list of unsolved issues – the main one being Brexit. With nine months until its deadline, the terms of Britain’s exit from the EU are nowhere near finalised.
Make the EU an association that countries want to join again
Today, young people across the continent see the European Union as the enemy, whilst populist politicians have exploited these resentments, creating anti-European parties and movements.
Since its establishment, the EU, an association that was founded to offer freedom, security and justice without internal borders, has survived many turbulences. Although the current crisis is based on a number of deep-rooted problems, odds are that these challenges will be overcome. To save the EU, Soros believes that it needs to reinvent itself via a ‘genuinely grassroots effort’ which allows member countries more choice than is currently afforded.
"Instead of a multi-speed Europe, the goal should be a 'multi-track Europe' that allows member states a wider variety of choices. This would have a far-reaching beneficial effect."
And even though he isn’t offering a proposition for a bill that someone needs to draft and pass as soon as possible, he has opened a conversation - a conversation about moving away from the EU’s unsustainable structure. “The idea of Europe as an open society continues to inspire me”, says Soros. And in order to survive, it will have to reinvent itself.
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.
