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Major US Investment Banks are Recalibrating and Pulling Back from China

Written by IntaCapital Swiss on February 27, 2025. Posted in Industry, News & Reports. Leave a Comment

Once upon a time China was regarded as one of the major centres for the expansion of investment banking, with many of these banks viewing China as one of the crown jewels within their portfolios. Today, with the United States applying more tariffs and restrictions on the country, the China economy is reeling from huge losses in the property sector; the economy which conservatively speaking has been sluggish, has put the brakes on deal flows. As a result, many global investment banks are rethinking their “China Strategy” and pulling back from the USD67 Trillion financial services market.

A number of analysts confirm that back in December 2024 a number of US Investment Banks conferred with the US Treasury regarding the rules and regulations as to how their clients may comply with investing in China. It is understood that many of these executives left the meeting with less understanding of the situation and many with more questions than answers. Experts suggest the bankers needed to understand the rules and guidelines concerning investing in those Chinese companies by their clients, which pose potential national security risks. Furthermore, which reporting requirements were needed and which deals would now qualify under the new rules.

So as these institutions pull back from China, the recipients of their largesse seem to be according to experts, Japan and India who are not filling the large investment hole that leaving China has produced. Indeed, many of these international investment houses and banks have reduced staff or as some analysts put it “pared to the bone” to levels that just meet the minimum staffing requirements by the Chinese financial regulators allowing these companies to operate in their jurisdiction. Despite numerous financial stimuli, many bank bosses are sceptical that there will be any decent improvement in China’s economic prospects.

Some experts point to November 2020 as the point where global confidence in China began to decrease. In that month, the Ant Group controlled by Jack Ma were just about to issue their IPO (Initial Public Offering), which at the time would have been the world’s largest, in the amount of USD35 Billion in Shanghai and Hong Kong. However, instead of marking what would have been a high point in China’s booming business sector, the Chinese authorities pulled the IPO at the last minute. Experts confirmed this action by the Chinese authorities marked the start of China’s war on private companies/enterprise, and the beginning of declining global confidence in China which also sabotaged Hong Kong’s standing as a major funding centre for Chinese companies.

Interestingly, analysts advise that some Wall Street banks consider China a long-term bet with one senior banker suggesting that there could be double digit growth in 2025, but experts suggest that his peers disagree, and China may take years to achieve this figure. However, let’s not forget Hong Kong where many US banks have successfully made significant profits from Greater China, which has historically accounted for a significant share of any earnings. Last week February 10^th – 14^th 2025 bankers were encouraged by a rebound in Chinese Stocks in Hong Kong (they hit a three year high), this on the back of China participating and maybe becoming a major player in the AI artificial intelligence sector.

However, all eyes are on the US administration and whether or not they will increase tariffs on imports from China having already levied a 10% charge and what will be China’s reaction and the overspill into their already problematic economy. Elsewhere on the tariff front, the recent bombshell of more tariffs announced on Tuesday 18^th February 2025 by Donald Trump where he intends to impose levies of 25% on the importation of auto parts, semiconductors, and pharmaceuticals as early as 2^nd April 2025. President Trump did not specify what countries he had in mind, but currently Germany seems to be on the cards.

The big question is will the president hold true to his pre-election promises or will he, like Canada and Mexico, use tariffs as a club to beat countries into agreeing to other demands. However, he has promised tariffs to put “America First” so whatever happens, 2025 may see an all-out trade war with the world and especially consumers are in for a fairly bumpy ride.

Trump Tariff Update February 2025

Written by IntaCapital Swiss on February 10, 2025. Posted in News & Reports. Leave a Comment

On Sunday 11^th February 2025, President Trump, whilst aboard Airforce One, announced to reporters that he would be applying tariffs of 25% on ALL imports of aluminium and steel widening the spread of tariffs to some of the United States’ top trading partners. Such partners include Canada and Mexico with whom he announced a moratorium on tariffs for one month, however the President did not specify when these new import duties will take effect.

President Trump, keeping to his word and pre-election promises also stated that the week starting 10^th February 2025 he would announce penalty or reciprocal tariffs on those countries that currently tax/tariff imports from the United States. He went on to say that once these reciprocal import duties had been announced such actions would be implemented almost immediately.

However, financial markets (that have recently been rattled by an unpredictable President regarding tariffs), where he has announced tariffs on both Mexico and Canada then he put them on hold, whilst at the same time carried out his threat of 10% import duties on all imports from China, who’s retaliatory tariffs come into effect today 10^th February. However, these current import levies are in part to help protect those domestic industries without whose help, President Trump may not have won those essential battleground states being fought over in last year’s presidential election.

According to experts in the ferrous arena, the United States has a vast demand for aluminium and in 2023 net imports were above 80% from countries such as Mexico, Canada, and the UAE (United Arab Emirates). Steel imports, whilst smaller in consumption to that of aluminium, are vital for areas manufacturing, aerospace, and in both green/renewable energy sectors and the fossil fuel sectors. During President Donald Trump’s first term some oil companies won exclusion from tariffs, so it will be interesting to see if such concessions are awarded in the second presidency.

Such announcements have put the executive arm for trading for the European Union on red alert, but they have announced that they will wait on further details before responding to the threat of these new tariffs. However, a spokesperson did go on to say that “the imposition of these new duties would be unlawful and economically counterproductive”. Elsewhere in Asia, South Korea which exports both steel and aluminium to the United States are already expediting searches for new markets, especially as by value the USA is the largest destination their of steel exports.

Some analysts have pointed out that due to high costs steel mills in the United States are already running at less than full capacity due to high costs, and now they would have to either whirr up production to compensate for lower imports putting prices up to their customers. President Trump has put tariffs front and centre in his bid to rebuild the US economy, but how many of these tariffs will be used as just a threat for him to get his own way in other areas?.

European Union Looking to Avoid a Trade War with the United States

Written by IntaCapital Swiss on February 5, 2025. Posted in News & Reports. Leave a Comment

Ever since Donald Trump was re-elected to the White House on Monday 20^th January 2025, the European Union has been preparing counter measures to the new president’s tariffs, which would mark the beginning of a trade war with the United States. However, with President Trump pulling his tariffs at the last minute with both Canada and Mexico*, the EU has become emboldened and feel that they can come to a negotiated agreement with the Trump administration regarding tariffs.

*Canada and Mexico – Tariffs of 25% on goods from both counties were due to begin on Tuesday 4^th February 2025, but after conversations between Donald Trump and the President of Mexico Claudia Sheinbaum followed by a conversation with the Prime Minister of Canada Justin Trudeau, President Trump delayed tariffs for one month. Both the leaders of Canada and Mexico agreed to up the ante in fighting migration and the flow of fentanyl into the United States, key demands by the US administration to avoid tariffs.

However, there is, according to person(s) close to the EU’s executive arm in charge of trading, a major stumbling block with the EU’s strategy as they have been unable to establish decent contacts within the new administration, with some key posts still awaiting senate confirmation. Furthermore in March, the exports of steel and aluminium will be discussed, and the EU will look to avoid conflict on this matter which has been brewing for some time. The Eu will also wish to get agreements with the new administration and avoid tariffs, especially as recent increased rhetoric from President Trump aimed directly at the European Union said that due to large trade deficits with the eurozone means that tariffs are definitely on their way.

In view of President Trump’s remarks the President of the European Union Ursula von der Leyen said” When targeted unfairly and arbitrarily, the European Union will respond firmly”. However, what the EU has to take into account is that the angst that President Trump has towards the bloc goes back a long way, so getting agreements on tariffs may prove a lot more difficult.

Furthermore, Germany’s Chancellor Olaf Scholz is currently making a habit of dissing President Trump, plus his pre-election remarks making it quite clear he was voting for Kamala Harris for the White House, will not exactly endear himself to the new president. Germany will also be in President Trump’s crosshairs as they have a massive trade surplus with the USA of in excess of USD 63.3 Billion as of close of business 2023.

Experts are suggesting that if indeed President Trump announces tariffs on the European Union the response may initially be muted along the lines of the Chinese who announced retaliatory tariffs on imports of US oil and Energy among other levies, but which amounted to less than USD 5 Billion. The word on the street is that the EU may feel that President Trump is using tariffs as a diplomatic club or hammer to get his own way on his policies (e.g. Canada and Mexico).

The EU may well have to increase their Defence/NATO spending, an ongoing demand from President Trump, and make concessions regarding the Russia/Ukraine war. No doubt policymakers are well aware of these demands and only time will tell if indeed the USA and the European Union can come to an agreement on tariffs, but with the bloc suffering from a deepening economic and political malaise, President Trump may well hold the winning hand. It must be remembered that at the recent World Economic Forum in Davos the President of the United States was quoted as saying “the EU treats us very very unfairly, very badly”, so Europe has been forewarned.

Trade Tariffs 2025 – Trump Lives up to his Election Promises, However…….

Written by IntaCapital Swiss on February 4, 2025. Posted in News & Reports, Uncategorized. Leave a Comment

On Saturday February 1^st, 2025, President Donald Trump announced sweeping tariffs on imports of goods from China, Mexico, and Canada, with China being hit with 10% above current tariffs and Mexico and Canada being hit with 25% tariffs. Some experts warned that such moves by the US administration could see the start of a trade war that could reignite inflation and negatively impact global growth. The president of the NFTC (National Foreign Trade Council) said that this move “threatened to raise the cost of everything from avocado’s to automobiles” and he hoped a resolution between America, Canada, and Mexico, could be quickly found.

Donald Trump signed three executive orders imposing said tariffs with a starting date of Tuesday 4^th February 2025. The announcement and subsequent executive orders made good on President Trump’s promises during the election campaign despite repeated warnings from renown economists and analysts who advised that a trade war with Mexico and Canada (USA’s top trade partners) would erode growth both globally and in the United States with the result being increased prices for both companies and consumers.

However, before Monday the 3^rdof February ticked round President Trump had already dialled back his plans for tariffs to start on Tuesday 4^th February 2025, having announced a month’s respite for Mexico. President Trump confirmed that during a telephone call with the President of Mexico Claudia Sheinbaum, she confirmed that she would send 10,000 troops to the border to help combat illegal immigration and the flow on fentanyl, which is a key Trump demand to avoid tariffs.

Similarly, on Monday 3^rd February 2025, the Prime Minister of Canada Justin Trudeau announced that President Trump had abandoned the February 4th deadline for tariffs, and like Mexico had agreed to a one month delay providing he took tougher measures to combat drug trafficking and illegal migration across their shared border. The concessions President Trump received from Prime minister Trudeau is the appointment of a new Fentanyl Czar, listing cartels as terrorists and in a joint venture with the United States, create a new strike force that will combat money laundering, organised crime, and drug trafficking.

In the meantime, China’s response to President Trump’s imposition of tariffs, has been to introduce their own tariffs on a number of US goods and targeting a small number of US companies. On Tuesday 4^th February 2025, China announced an imposition of a 15% levy (under USD5 Billion) on imports of US energy and a 10% levy on US oil and agricultural equipment. The Chinese government also targeted PVH Corp (owner of Tommy Hilfiger, Calvin Klein, Olga and True) and Illumina Inc (a gene sequencing company) putting them on a blacklist.

The Chinese government also imposed stricter controls on the exports of critical metals such as tungsten, used in defence, aviation, and electronic industries. Experts suggest that this is a muted response designed to avoid an all out trade war, but enough to show President Trump that China can hit America where it hurts. The American President wishes to speak to President Xi before their tariffs and export controls take effect on 10^th February 2025, perhaps another reason why China held back on an all-out response.

Elsewhere, President Trump suggested that the eurozone (European Union) could be next in line for tariffs and could happen “pretty soon”. He went on to say that “they don’t take our farm products, they don’t take our cars, they take almost nothing, and we take everything from them. Millions of cars, tremendous amounts of food and farm products”. The European Union initially condemned President Trump for initiating tariffs and advised they will respond in kind if they become a target.

Conclusion

Throughout President Trump’s election campaign the slogan has been “America First”, “Tariffs”, he even said tariffs is his favourite word. Before Donald Trump became President and after he became President he trumpeted tariffs, tariffs, tariffs. We shall bring factories back to America, create more jobs, lower taxes for everyone are the words that have been put forth to the American people. However, is President Trump using tariffs as a diplomatic club to get his way in other areas such as with Mexico and Canada. We shall see what will happen with the United Kingdom and the European Union, but for those American voters waiting on tariffs, they could be sorely disappointed.

Federal Reserve Holds Interest Rates Steady January 2025

Written by IntaCapital Swiss on February 3, 2025. Posted in News & Reports. Leave a Comment

On Wednesday 29^th January 2025, the Federal Reserve announced that after lowering interest rates by 100 basis points in the last few months of 2024, they were holding interest rates steady in a range of 4.25% – 4.50%. The FOMC (Federal Open Market Committee) had no dissenting voters as they agreed unanimously to press the hold button on interest rates. The Chairman of the Federal Reserve said “We do not need to be in a hurry to adjust our policy stance” adding that the Federal Reserve was pausing interest rates in order to see further progress on inflation which currently remains somewhat elevated but has moved closer to the goal of 2%.

Currently some analysts are saying that the US economic landscape appears stable but at the same time wildly uncertain especially as recent macroeconomic fundamentals have been unchanged and healthy. However, with the elevation of Donald Trump to the White House Chairman Powell noted “Federal Officials are waiting to see what policies are enacted” and what effect such policies (tariffs, taxes, immigration) will have on inflation. Experts have said that the prospects of tariffs on Mexico and Canada, who are two key trading partners with the United States, have cast a shadow over the economy of the United States.

Following the announcement that the Federal Reserve were holding interest rates, President Donald Trump renewed his attack on the central bank saying they had “failed to stop the problem they created with inflation”. Previously, President Trump had demanded that interest rates come down further, but Chairman Powell, who is doing his best to keep himself and the Federal Reserve above political machinations noted that keeping interest rates on hold was not political despite the fact it may look that way. The president also went on to say that the Federal Reserve has “done a terrible job on bank regulation” and insisted he will put this responsibility solely within the purview of the Treasury Department. However, some legal experts have said that this would be against the law.

In December 2024 Federal Officials advised that they expected only two rate cuts throughout the whole of 2025, which was a reduction in policy that had not been previously anticipated by the financial markets. Recent data released showed that in December 2024, an underlying measure of consumer prices rose by less than anticipated being the first decrease since June 2024. Analysts have looked back at President Trump’s first stint in the White House where he promised more tariffs on countries exporting to America, taxes on workers and companies will come down, and a massive number of jobs and factories will come home. In the end the exact opposite happened, and the Federal Reserve faced a slowing economy led by factories announcing many redundancies. So perhaps Chairman Powell and his officials can feel somewhat vindicated by keeping rates on hold.

Dispersion Trades Come into their Own Amid Sell-off in Tech Stocks

Written by IntaCapital Swiss on February 3, 2025. Posted in News & Reports. Leave a Comment

On Monday 27^th January 2025 global investors dumped tech stock as a new player from China called DeepSeek, emerged in the AI (artificial intelligence market) threatening the dominance of the United States as companies such as Nvidia had a record one day loss of circa USD593 Billion. Other major shares tumbled such as chipmaker Broadcom down 17.4%, Alphabet fell 4.2%, and Marvel Technology fell by 19.1% to mention but a few. The catalyst for this fall was DeepSeeks AI model named RI which by all accounts uses less data at a fraction of the cost compared to that of the competition.

Many hedge fund traders saw an opening for dispersion trades which buys options in single stocks and sells contracts on an index and as such this trade had its best day since 2020 as fears for A! spread through the market like wildfire. The dispersion trade therefore is a bet on an index remaining calmer than its individual stocks. Once the domain of the hedge funds, the dispersion trade is now offered by banks to their clients which they have packaged into easy to access swaps. The Cboe S&P 500 Dispersion index* enjoyed its biggest gain since 2022.

*Cboe S&P Dispersion Index – This index may provide an indication of the markets perception of the near-term diversification or equivalently, an indication of the markets perception of the near-term of idiosyncratic risk in the S&P 500’s constituents. In simple terms dispersion refers to the range or spread of individual stock returns around the index’s average return.

Essentially dispersion trading is a form of arbitrage, specifically volatility arbitrage which as mentioned above is betting on the volatility of individual stocks against a more placid index where the stocks are quoted. A simple explanation of arbitrage is the selling and buying of the same stock, currency, or commodity at the same time in two different markets but where there is a small price differential. The profit between buying at the lower price in one market and selling at the higher price in another market is known as arbitrage trading.

Elsewhere, the sell off in tech stocks benefited a number of quant trades where the trading model is going long on some stocks and short on others. This is a strategy that buys steady stocks and sells the opposite (in this case tech stocks) which according to analysts jumped the most since 2020. Again, when the two positions are traded out the profit (or loss) is the arbitrage from the two trades.

Trump, Tariffs, BRICS, and Artificial Intelligence

Written by IntaCapital Swiss on January 29, 2025. Posted in News & Reports. Leave a Comment

In his latest pronouncements on tariffs, President Trump announced that he would enact cross-border tariffs higher than 2.5%, a figure apparently propounded by the incoming Treasury Secretary, Scott Bessent. The President told reporters aboard Air Force One that “I have in mind what it’s going to be, but I won’t be setting it yet, but it’ll be enough to protect our country”. This is yet another signal from the President that he is prepared to reshape supply chains through the introduction of tariffs in order to put “America First”.

President Trump went to tell reporters that he would be using tariffs to target specific sectors such as aluminium, copper, pharmaceuticals, semiconductors, and steel. He also advised that he may well target Mexico and Canada with tariffs on their automobile exports to the United States, the same countries that he has already targeted with tariffs of 25% on all exports to the USA (to be imposed on 1^st February 2025). President Trump’s underlying belief is that tariffs on countries exporting to the United States will increase the number of jobs at home, bring factories back, and taxes on businesses and individuals will come down.

Interestingly, the threat of tariffs on the semiconductor sector came shortly after the Chinese start-up on AI (artificial intelligence) DeepSeek* not only worried investors but erased billions from the market capitalisation of Nvidia Corp**. It appears the DeepSeek model can be as effective as other well-known AI models but at a fraction of the cost. This has translated into less data centres signing up to the likes of Nvidia, as DeepSeek can drive down the consumption of electricity, and they now challenge the assumption that the United States hold dominance in the AI market.

*DeepSeek – Until very recently, DeepSeek was a little known Chinese start-up, but has sent shockwaves through the tech market having released an AI model named RI that can outperform leading developers from the United States such as Nvidia, OpenAI, and Google. Is reported that DeepSeek only had a USD 6 Million budget to produce RI, as opposed to the multibillion dollar budgets employed by their US counterparts.

**Nvidia – Is famous for accelerated computing to tackle challenges no-one else can and their work on AI and digital twins is transforming the world’s largest industries. Their work on AI using a GPU (graphics processing unit as opposed to a CPU – central processing unit) allows them to crunch massive amounts of data for AI much faster. When RI cast doubt on the supremacy on of US tech firms, Nvidia shed circa USD590 Billion in market value which was the biggest fall in US stock market history.

President Trump said of DeepSeek, “The release of DeepSeek should be a wake up call for our industries and that we need to be laser-focused on competing to win”. On Monday 27^th January 2025, there was a major market fall-out regarding DeepSeek, with technology stocks in Europe and the United States falling by circa USD1 Trillion, with investors now questioning the spending plans of some of the biggest companies in the USA.

On the tariffs front, experts are saying this economic tool will not just be used against those countries with just a trade surplus with the United States. Indeed, President Trump will use tariffs in other areas such as the recent spat with Colombia, where the country’s President Gustavo Petro barred and refused landing rights to two military flights from the United States carrying deported Colombians. President Trump threatened punitive tariffs of 25% on Colombian exports to the USA unless the Colombian acquiesced, and despite counter tariffs being threatened, President Petro agreed to accept migrants (including those arriving on military aircraft) without limitation, hindrance or delay.

Elsewhere on the Trump/Tariff radar, Europe and the EU bloc has been threatened with tariffs regarding those countries with trade surpluses and those countries (just about all of them) which President Trump believes aren’t paying enough on defence. Also on the radar are the BRICS* nations, who Trump has promised to impose 100% tariffs on should they try and create a rival currency to the US Dollar. Leading politicians within the BRICS have already floated the idea of a rival currency.

*BRICS – is recognised as a group of emerging market countries and the acronym stands for Brazil, Russia, India, China, and South Africa. Originally the acronym was BRIC (as South Africa was not part of the founding members) and was coined in 2001 by a Goldman Sachs economist Jim O’Neill. On January 1^st, 2024, Egypt, Ethiopia, Iran, and the United Arab Emirates joined BRICS, who also announced that their newest member is Saudi Arabia, but the United Kingdom has yet to put pen to paper so as yet have not officially joined

Over the last 24 years, BRICS has grown into what is effectively a world club comprising of ten member states, some of whom are major energy producers such as the United Aram Emirates, whilst others are recognised as the largest consumers amongst the emerging or developing economies. Many western commentators feel that BRICS, led by China, are an anti-western organisation and have ambitions to have their own currency moving away from global reliance on the US Dollar.

Many experts feel that President Trump will stay true to his word and invoke tariffs on many countries, including America’s allies. He is especially adamant about those countries he feels will do the United States harm and he has named Brazil, India, and China in that bracket. How far the President will go with tariffs we will have to wait and see, but with China upending the Artificial Intelligence sector, it looks like certain countries are in for a bumpy ride.

Federal Reserve Cuts US Dollar Interest Rates

Written by IntaCapital Swiss on September 30, 2024. Posted in News & Reports. Leave a Comment

On 18^th September 2024 the Federal Reserve cut interest rates by 50 basis points: an aggressive start to bring interest rates down in the United States. After more than twelve months, the FOMC voted by 11 to 1 to lower the federal funds rate to a range of 4.75% – 5%, reflecting the first interest rate cut in over four years. Whilst the markets are expecting further rate cuts this year, projections released by the Federal Reserve regarding the same showed that there was a narrow majority of 10 to 9 in favour of further cuts in 2024.

Following the announcement, the Federal Reserve Chairman Jerome Powell was quoted in a press conference as saying, “This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%”. Whilst inflation is indeed moving downwards, analysts suggested that the Chairmans press conference was economic speak for “we are still not sure about the labour market”.

However, Chairman Powell did caution the markets not to take this rate cut as a confirmation that the Federal Reserve has now set the pace at which rate cuts will be considered in the future. As usual, any further rate was tempered with a statement from policymakers that “they will consider additional adjustments to rates based on incoming data, the evolving outlook and balance of risks”. Further tempering was added when policymakers also advised that jog gains have slowed, and inflation remains slightly elevated.

Despite these somewhat negative announcements regarding future interest rate cuts, the financial markets have taken the opposite view with traders ramping up their bets on future interest rate cuts and pricing in a further 70 basis points of rate cuts between now and the end of Q4. Experts suggest that the pace of rate cuts will be as the market predicts, as previously traders have done a relatively good job of predicting the amount and early pace of the cuts. Indeed, despite negative rhetoric, including the warning that ‘the outlook for the world’s largest economy was uncertain’, the ‘Dot Plot’* published by the Federal Reserve indicates that interest rate could be cut by another 50 basis points by the end of Q4, and a further full 1% cut in 2025.

*Dot Plot – This is a graphical display consisting of data points which the Federal Reserve uses to predict interest rates. The graphs display quantitative variables where each dot represents a value.

The Declining Value of the US Dollar

Written by IntaCapital Swiss on September 2, 2024. Posted in News & Reports. Leave a Comment

In the past two months the US Dollar has declined 5% against major currencies (the US Dollar index currently stands at a 13 month low) suggesting that increase in the value of the dollar in the years after the Covid-19 Pandemic has come to end. Analysts suggest that this is not too surprising because the rhetoric coming out of the Federal Reserve has recently softened regarding interest rates. Indeed, the Chairman of the Federal Reserve, Jerome Powell, made it plain at the Jackson Hole Economic Symposium (20^th – 22^nd August 2024) that inflation was, in fact, receding. Chairman Powell went on to say “Inflation is on what increasingly appears to be a sustainable path to our 2% objective”.

The big question at the moment is not if, but by how much the Federal Reserve will cut interest rates at their next meeting on September 18^th, 2024, and will sustained cuts in interest rates erode the dollar haven that the United States has enjoyed for the last three years? Analysts suggest that according to bond market pricing* financial markets can expect a 0.25% reduction in interest rates at the September Federal Reserve meeting. However, there are those in the market who suggest that the Federal Reserve could indeed cut rates by a full half percentage point.

*Correlation Between Interest Rates and Bond Prices – The relationship between interest rates and bond prices are such that when interest rates fall bond prices rise and when interest rates rise bond prices fall. Thus when existing bonds have a lower interest rate than current interest rates they are less desirable, so as the interest rate on the US Dollar falls, so bonds become more attractive and their price rises.

What effect will the declining value of the US Dollar have on emerging markets, exporters of commodities, and the rest of the world? As the dollar declines due to interest rate cuts some analysts are questioning whether the status as global reserve currency will be affected. Experts agree that the reserve currency status will not be threatened by a declining US Dollar as the United States is still the safest place to invest with buoyant stock markets and decent yields. However funds that are domiciled in the United States may look outside its borders as investment opportunities open up in other parts of the world.

Elsewhere, countries whose economies rely on the exports of commodities will usually reap the benefit of a falling US Dollar, as the commodity price correlation usually moves inversely to that of the US Dollar. Emerging markets that have not had the best of times in recent years should broadly benefit, especially those resource-poor markets (Inc India and China) who rely on the importation of commodities denominated in US Dollars. The US Dollar has lost ground against the G-10 currencies, the largest of which is within the European Union and specifically the Federal Republic of Germany, where a stronger Euro will only increase the pain of weakening capital expenditure and consumer confidence.

The odds are very good for the Federal Reserve to cut interest rates at their September meeting. However, Chairman Powell always hedges his bets by reminding the financial community that their decisions are always data driven. He reminded us at Jackson Hole, with the upside of beating inflation against the downside of labour market concerns (which had cooled substantially with unemployment rising to 4.3%), future actions would depend on incoming data and the balance of risks.

Are Global Markets Facing a New Period of Volatility?

Written by IntaCapital Swiss on August 16, 2024. Posted in News & Reports. Leave a Comment

On Monday 5^th August 2024 trading rooms in financial centres across the world faced one of the most volatile and chaotic days in recent history. In the United States by the close of business on Monday The MSCI (Morgan Stanley Capital International) All Country World Index (ACWI) was showing 90% of stocks had fallen, in what has been termed as an indiscriminate global sell-off. In Tokyo the Nikkei was down 12%, in Seoul the Kospi was down by 9% and at the opening bell in New York the Nasdaq plunged 6% in seconds. However by the Thursday evening of that week the turmoil in the markets had been forgotten as the S&P and ACWI were both down by only 1%.

But what brought about this huge summer sell-off? Many financial experts suggest that financial markets had convinced themselves that a soft land for the US economy was a given especially after what was perceived as a successful fight against inflation, with interest rates being kept high by the Federal Reserve. However, the moves in the markets were completely off the scale in relation to what actually triggered the sell-off. Analysts suggest the touchpaper was lit when two economic updates were published in the first two days of August 2024, plus a further announcement by the Bank of Japan (BOJ) that they were raising interest rates.

The first set of data was a survey of manufacturing, which was closely followed by official data released regarding the state of the US labour market. When taken together analysts suggested that instead of a soft landing, the US economy was indeed heading for a recession, and that unlike the Bank of England and the European Central Bank (ECB), the Federal Reserve was moving too slowly on interest rate cuts. The data released on new jobs, which was by no means the worst of the year, fell short of expectations of being only 114,000 as opposed to the expected figure of 175,000.

The start of the sell-off began in the Asian markets on Monday 5th August, as a stronger yen and rising interest rates in Japan combined with the bad economic data coming out of the United States. A vast number of market players and investors have been tied up in the “Yen Carry-Trade”*, where advantage has been taken of low interest rates in Japan allowing investors to borrow cheaply in Yen and invest in overseas assets especially in large US tech stocks and Mexican bonds. A number of traders felt the Yen carry trade was the “epicentre” of the markets and the unwinding of these trade caused the shakeout that followed.

*Yen Carry Trade – For many years cheap money has been in Japan where interest rates have held at near zero. Any investor, bank, hedge fund etc can, for a small fee, borrow Japanese Yen and buy things like US tech stocks, government bonds or the Mexican Peso which have in recent years offered solid returns. The theory to this trade is that as long as the US Dollar remains low against the Yen investors can pay back the Yen and still walk away with a good profit.

The sell-off also hit the Tokyo Stock Exchange which recorded its sharpest fall in 40 years, whilst the VIX** also known as the “Fear Gauge” hit a high of 65 (only surpassed a few times this century having enjoyed a lifetime average of circa 19.5), implying the markets expect a swing of 4% a day over the next month in the S&P 500. Analysts announced that when trading hit its peak it was very reminiscent of the 2007 – 2009 Global Financial Crisis, but without systemic risk fears. A well-known Japanese equity strategist suggested “The breath and the depth of the sell-off appeared to be driven a lot more by extremely concentrated positioning coming up against very tight risk limits”.

**The VIX – is a ticker symbol and the in-house or popular name for the Chicago Board Options Exchange’s (CBOE) Volatility Index. This is a popular measure of the stock market’s expectation of volatility based on S&P 500 index options.

In the last four years Yen carry trades have been very popular as Japan has been essentially offering free money keeping interest rates at almost zero to encourage economic growth whilst the United States, the United Kingdom and Europe were raising interest rates to fight inflation. For many, borrowing at next to nothing in Japan and investing in a US Treasury Bond paying 5% or Mexican Bonds paying 10% seemed like a no brainer. However, once the market fundamentals of this carry trade started moving towards negative territory the global unwinding of these trades was an inevitability.

The market makers were always in evidence throughout the sell-off, suggesting that the structure of the markets were still in place. However, experts said that the biggest moves on the VIX were driven by a tsunami of investors all moving in the same direction. As one senior executive put it “there was no yin and yang of different views”, it was just one way traffic. However, the rebound on the following Thursday just highlighted the lack of fundamental clarity where, as one expert put it “The market is so fascinated by what is the latest data point that the ties between day-to-day stock price moves and fundamentals are more disconnected than ever before”.

There have, however, been undercurrents in the background indicating a shift in current trends, and with unnerving global politics from the United States to the Middle East plus continued rumblings from China over Taiwan, volatility in the markets is ever present. Add to this US growth trending downwards and market/investor concern over stretched valuations in the US tech market, taken together with other factors including the fourth consecutive move south in the S&P and the VIX trending higher, a negative move in the markets could have been anticipated. So, whilst the fundamentals were in place to be interpreted by market experts, it was the data points and the unwinding of the Yen carry trades that kicked off the volatility swings.

Looking back from today (Friday 16th August) it is as if the volatility and single day crash never happened, however a number of experts suggest that markets could remain volatile until the Federal Reserve interest rate decision in September. Many renown commentators have said what happens in the United States does not stay in the United States, especially as the country has been a major driver of global economic growth, so if the United States does go into recession the world as a whole would suffer. Analysts also suggest that there are further Yen carry trades to unwind which will impart volatility into the markets. In the short-term, therefore, it would appear volatility is on the menu especially with an uncertain presidential election in November. Long term volatility is difficult to predict, but the markets will now be aware that when there is consensus thinking e.g. a soft landing for the US economy and all is rosy in the garden, markets can quickly turn on their heads and bite you very badly.

Tag: United States