Tag: World News

The Trump Effect on the UK and the EU

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An amazing political comeback by ex-President Donald Trump will see him re-enter the White House on Monday 20th January 2025, and if he sticks to his promise that he will impose tariffs on many of the imports into the United States, the cost estimate by experts to the United Kingdom will be billions of pounds. The fact that Labour sent key electioneering staff to help the Democratic campaign, and Foreign Secretary Lammy’s tirade against President elect Trump, calling him  “Neo Nazi Sociopath”, may well impact on future trade negotiations. 

Figures released by analysts suggest that the United Kingdom could be hit to the tune of £20 Billion should President elect Trump impose tariffs of 10 to 20% on the United Kingdom’s exports to the United States. After the European Union, the United States is Britain’s largest trading partner and, up to the year ending 30th June 2024, the UK delivered exports to the United States to the value of GBP188.2 Billion. The hardest sector to be hit by tariffs will be pharmaceuticals and medical goods (largest export sector to the United States), followed by the automobile sector (cars and parts) and aviation parts such as jet engines. It must also be remembered that the whisky producers in Scotland are highly dependent on their exports to the United States.

If tariffs are introduced, figures released by the Centre for Economics and Business Research, suggest Britain’s economic output could be trimmed by just under 1% by the end of his presidency in 2023. Furthermore, figures released show a GDP growth in Q3 in the United Kingdom slowing to circa 0.1% and further headwinds from tariffs could severely impact economic growth. Data released by NIESR (National Institute of Economic and Social Research), show that a trade war between the United States and the United Kingdom could reduce growth in the UK by 0.7% in President elect Trump’s first year and 0.5% in his second year.

If GDP does fall in line with the above estimates from the NIESR this will make life difficult for Chancellor Reeves to meet her “Stability Rule”* which will raise the prospects of further taxation, a policy the current government carries out with great gusto and relish. Furthermore, President elect Trump’s protectionist policies may well according to experts put upward pressure on the cost of borrowing. Experts suggest that under President Trump the impact on bond yields could negatively affect UK borrowing costs, which in turn could dampen activity putting further strain on the UK’s public finances. 

* Chancellor’s Stability Rule – The requirement is that the current budget (tax revenues minus day to day spending) be in surplus by 2029/20230.

President elect Trump, in his campaign America First slogan, will continue his threats to pull out of NATO if Europe and Great Britain do not increase their defence spending to 2.5% of GDP, with a rumoured 3% of GDP apparently going to be tabled once he is in the White House. The new Defense Secretary Peter Hegseth is not a big supporter of the Ukraine and has branded NATO members “As a group of self-righteous and impotent nations using America as an emergency number”. The United Kingdom may well have to adjust their defence spending upwards if that’s what it takes to keep the United States supporting Ukraine, otherwise Prime Minister Starmer’s vow to back Ukraine will mean nothing.

Elsewhere, the Labour government is hoping for a more constructive relationship with China. Indeed, Foreign Secretary Lammy, who is notoriously anti-Trump, has already visited China confirming that the new government will have greater cooperation on issues such as trade, A1 and climate. However, it is obvious to all that President elect Trump’s views on China are diametrically opposed to those of Foreign Secretary Lammy and the Labour government. If the United Kingdom are looking to build trade deals with China whilst President elect Trump is looking to hit China with 60% tariffs, it will be interesting to see how far the UK/China labour policy pans out. 

On the climate front, the energy secretary David Miliband has announced that Great Britain is on its way to becoming a green energy “superpower”. He has promised there will be billions invested in the United Kingdom’s green energy programmes, and he has lifted a ban on new onshore turbine wind farms and has given his approval on to build a mass of solar energy farms. In the meantime, President elect Trump has moved totally in the opposite direction, and whilst labour is announcing a break from oil and gas, in his first presidency Trump took the United States out of the Paris Agreement (climate agreements) and will more than likely repeal any of the outgoing President’s green policies that did not make it over the line. If the United Kingdom is looking for any help from the United States in their green policies, Mr Miliband has taken a leaf out of Lammy’s book and called the President elect a moron, making it unlikely that they will come to any kind of agreement.

Donald Trump will be inaugurated as President of the United States on Monday 20th January 2025 and from then on the possibility of tariffs becomes a reality for the Labour government. However, there is the potential to avoid tariffs, which according to experts is undesirable for the government and that is a free trade agreement. In his first term as President, Trump pursued this policy much more proactively than the current incumbent of the White House. Such an agreement would make UK exports cheaper than those hit with tariffs, but the big sticking point remains food standards and it will be up to the Labour government to decide what is best for the United Kingdom.

The Trump Effect on Latin American Economies

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With Donald Trump decisively beat Kamala Harris in the race for the White House, analysts and experts alike suggest that there will be far reaching economic consequences for the rest of the world. It is suggested that if the President elect only enacts a small portion of his election promises, such as financial demands on NATO partners, deregulation and increased oil drilling and tariffs, the negative effect on inflation, government finances, interest rates, and economic growth will be felt by countries across the world. In Congress, the Republicans have already secured the Upper House (the Senate), and if predictions are correct they could secure the Lower House (House of Representatives), which will make it easier for the President Elect to push through his policies.

One of Donald Trump’s key economic pledges is tariffs, which includes a 10% to 20% tariff on all imports into the United States except for China who will be hit with a 60% tariff on all exports to the Unites States. Experts advise that of all the policies, the “Trump Tariff” policy is likely to have the largest global impact as they lower growth for exporters, have a negative effect on public finances and inhibit global trade. The President elect said during his campaign for the White House “Tariff” is his favourite word and is “the most beautiful word in the dictionary”. Interestingly, and supporting his own stand on tariff’s, Trump took the unusual step of threatening John Deere, (the agricultural manufacturer) with a 200% tariff if they moved production to Mexico. 

Below is an overview by experts on selected countries in Latin America as to what effects the economic policies of President elect Trump will have on their economies.

Latin America

The re-election of ex-President Donald Trump may well bring important and significant challenges to Latin America. The President elect has already stated he will place a 60% tariff on all Chinese exports to the United States, so how will he respond to China’s growing influence in the region? Many South American countries find it difficult to overlook China’s direct economic commitments, so the Trump administration may well have to prioritize regional economic policy.

  1. Brazil

On Wednesday 6th November 2024, when it was announced the Donald Trump would be re-entering the White House, the Brazilian finance minister Mr Fernando Haddad said, “The world woke up on Wednesday more tense than it was yesterday”. Indeed, such remarks were echoed to an extent in other parts of the government where certain factions were advocating a delay in planned public spending cuts, due to the expected ripple effects of a Trump administrations effect on global financial markets. 

However, many analysts in Brazil feel that a Trump administration will create a global liquidity vacuum, so there must be immediate implementation of fiscal measures (spending reductions of circa R$40 – R$60 Billion (USD7 – USD10.5 Billion) ). Furthermore the protectionist policies of the incoming President including tariffs could well jeopardise Brazilian industrial exports to the United States. China and Brazil have vey close economic ties and if the protectionist policies of the incoming administration slow down the Chinese economy, the agribusiness sector of Brazil could find itself in trouble. Some experts advocate that Trumps policies could keep inflation high in the United States and will therefore keep interest rates high in both countries, which may well lead to less direct foreign investment in Brazil. 

  1. Mexico

President elect Trump has already made his feelings and intentions towards Mexico exceptionally clear. At a rally In North Carolina, on the very last day of campaigning Donald Trump made a precise policy decision to his supporters. He announced that Mexico’s President Claudia Sheinbaum would be the receiver of one of his first telephone calls in which he would advise that if she did not stop the onslaught of drugs and criminals coming into the United States, he would impose an immediate tariff of 25% on everything coming out of Mexico bound for the United States. 

Indeed, former foreign minister Jorge Castaneda said that a Trump administration was a nightmare scenario for Mexico as the President elect’s victory was partly due to his standing on and one of his chief promises to end illegal immigration across the southern border of the United States. Early indications of looming problems for Mexico was when the presidential race was called for Trump the Peso hit its lowest level against the US Dollar since 2022 at 20.8 to the dollar. 

Furthermore, Mexico for some years has been enjoying a “Nearshoring bubble” and as experts line up to say that reshoring and protectionism is back, several companies in America have paused planned investments in Mexico. This includes the President elects close friend and confidant Elon Musk, who owns Tesla. It is well known that the President elect hates trade surpluses and Mexico in 2023 had a trade surplus of USD152 Billion, the second largest deficit after China. 

The Mexican economy is driven almost exclusively trade with 83% of its exports going to the USA. Some economists are warning that even a small increase in tariffs could lead to a rise in unemployment, a rise in poverty, reducing Mexico’s long-term economic growth and prompting more Mexican nationals to migrate to the United States. Analysts point to the fact that few world economies are more tightly bound than Mexico and the United States with some experts predicting that that under a worst-case scenario the economy of Mexico could fall into recession, the Peso will depreciate, and inflation will rise. 

  1. Argentina

President Javier Milei was the first foreign leader to meet President elect Donald Trump after his stunning victory in the 2024 United States presidential election. President Milei also said of President elect Trumps victory “that the forces of heaven were on our side”. Indeed, following the election of ex-President Trump the Argentinian financial markets enjoyed a significant upturn stemming from the anticipated closeness of President elect Trump and President Milei. Experts suggest that as an ally of the current Argentinian administration, President elect Trump, as he did in his first term, he will promote US investment in Argentina’s oil sector.

Further signs of optimism after a Trump victory was on 6th November 2024 where Argentinian US Dollar denominated bonds enjoyed gains in early trading plus the country’s risk index dropped to its lowest level since 2019 at 872 basis points. This index is indicative of what premium investors demand to hold local bonds compared to equivalent US debt and the S&P Merval, which is Argentina’s main stock index rose by more than 3%. 

The last time Argentina had a right wing government (President Macri 2015 – 2019) the country enjoyed a close relationship with the Trump administration, who were instrumental in securing an IMF loan in 2018 of USD44 Billion. Many commentators see a Trump administration as beneficial to Argentina, which has already been good for Argentinian assets, but long-term implications, as always, remain uncertain.

  1. Colombia

A big problem for the Trump administration will be Colombia, where President Gustavo Petro and his administration have been openly critical of the United States’ role in global affairs. President Petro was one of the last Latin American leaders to congratulate Donald Trump on his re-elevation to the White House. In fact, he only acknowledged the ex-Presidents victory on X (formerly twitter). He further indicated his feelings against America’s pro-Israel stance and their blockage of Venezuela, showing ideological affinity with Cuba.

The Columbian’s President stand on Gaza and Israel has deepened an already strained relationship with Washington, and he furthermore severed diplomatic ties with Israel, accusing them of Genocide. Columbia also represents the largest source of cocaine entering America, and President Petro has not been as enthusiastic regarding the eradication of its production. Donald Trump has a zero tolerance drugs agenda, and the United States is the largest donor of foreign aid to Colombia which maybe under threat in the future.

The Colombian government are presently trying to complete a deal with the United States for a USD40 Billion climate change investment plan, and if they cannot secure this agreement before the 20th January 2025, experts suggest that any negotiations with the Trump administration would come with substantial caveats, if indeed an agreement could be reached. An alternative could be China, but experts agree that would only increase the current tensions, and the outlook for Columbia’s economy maybe bleak unless President Petro comes to some agreements with President elect Trump’s administration.

  1. Peru

China is Peru’s main trading partner, and if President elect Donald Trump carries out his threats regarding a 60% tariff on all China’s exports to the United States, this could have an indirect negative effect on the economy. The intended tariff on China’s exports to America would mean a potential slowdown in the country’s economy which in turn would translate into lower prices and falling demand for Peru’s exports of copper, iron ore and other raw goods.

Data released by Peru’s Foreign Trade and Tourism Ministry show that between January and August 2024, China accounted for USD16.7 Billion or 36% of Peru’s exports of which total mining exports accounted for USD12 Billion or just under 75%. 

Although Peru export quite a high volume of products to the United States, these are products they are happy not to protect, and according to data released by experts with projections up to 2029 under a Trump administration exports could only fall by 1%. There are also opportunities for Peru as, while China may be economically harmed by tariffs, Peru could step in with more exports such as textiles and safety glass for cars. It should also be noted that China’s President Xi recently inaugurated a USD1.3 Billion mega port (Chancay) in Peru which experts suggest will become South America’s biggest shipping hub. 

  1. Paraguay

Regional experts on South American countries suggest that the election of ex-President Donald Trump opens the door for closer relations between Paraguay and the United States. At a time when a number of South American countries are aligning themselves more with China, Paraguay can present itself as a strong ally to the United States. Under the current President Santiago Pena, Paraguay has probably the most effective cabinet and administration in its history.

In contrast to a number of other South American countries, Paraguay maintains diplomatic relations with Taiwan, has been an ally of Ukraine and a vocal supporter of Israel in their current war in Gaza. Such a political stance should be music to the ears of President elect Trump, and it is therefore essential for economic growth that Paraguay catch the eye of the President elect at a very early stage. Paraguay is uniquely situated between Santiago, Sao Paulo, and Buenos Aires, giving the country the opportunity to become a regional hub. 

There is also considerable room for economic growth between the United States and Paraguay: where in 2023 bilateral trade was worth USD3 Billion, whereas Columbia’s was circa USD39 Billion. Paraguay also enjoys a number of sources of green energy, and the country’s ability to produce substantial amounts of green hydrogen through harnessing electricity from their two hydroelectric dams (Itaipu and Yacyreta). Global demand for green hydrogen is expected to dramatically increase in the coming years driven by international commitments to reduce carbon emissions. Paraguay appears to be well placed to benefit economically from a Trump presidency, hopefully President Pena, whilst a recognised ally of the United States, can become a close friend of President elect Donald Trump, thereby enhancing closer economic ties.

Final thoughts

There are some experts suggesting that the Trump victory actually presents a unique opportunity for the countries of Latin America. As many countries are confronted by political instability, climate change, and economic challenges, the leaders should follow mechanisms of a collaborative nature to create one voice. They could then adopt strategies for instance that could see them acting as a regional bloc for trade purposes, help address the crisis in Venezuela, attack climate change and organised crime together. Whilst a Trump presidency often creates a polarising effect, this time he might bring the countries of Latin America together.

The Future of America’s Economy: Donald Trump vs. Kamala Harris

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Experts and analysts from many walks of life have been mulling over what effect the two presidential candidates (Trump/Harris) will have on the economy of the United States. Both candidates have very different visions of an economy that they will build if/when they get elected to the office of President of the United States of America. Below are some of the differing policy decisions the candidates will make as they try to shape America’s future.

1. Trade policy

Trump

During his first and only term as President of the United States Donald Trump ushered in a new era of trade policy for America by introducing tariffs. Once again, he has promised to put his “America First” policy back on track with greater fervour than before. Donald Trump has informed the voters that he will introduce a baseline tariff of 20% on all imports with a 60% tariff on any imports from China. He has further promised massive new tariffs on those countries that abandon the US Dollar and all imports of cars from Mexico. 

Trump has said that these new tariffs will fund everything from child care to tax cuts, but experts are sceptical as they suggest that the tariffs won’t come close to creating the revenue this policy requires. Indeed, such experts suggest that the best case scenario is that tariff revenue could be between circa USD 200 – USD 400 Billion per year, but these numbers would drop as trade realigns. Furthermore, Trump has promised voters that he will revoke China’s “Most Favoured Nation” status, along with banning Chinese investors from buying US real estate or companies, and he has vowed to keep United States Steel Corp in US Ownership, blocking a potential sale to the Japanese.

Harris

Kamala Harris has issued very little in the terms of trade policy but has vowed no major departure from President Biden’s current trade policies, which have retained all of the Trump’s administration’s tariffs, plus adding a couple of new ones. She has also agreed with Trump, vowing to keep US Steel Corp in US ownership, and has gone on to say she will make available tax credits to help businesses in the United States compete with China. However, she has warned voters that Donald Trump’s promised increase in tariffs for all imports would increase the costs for consumers and argues that it is nothing more than a National Sales Tax. Experts suggest that Harris is expected to expand and enhance the United States domestic technological and economic strength by promoting resilient and diversified global supply chains. Political commentators suggest that voters will be swayed by the fact that Vice President Harris’s trade stance is not that of Donald Trump. 

2. Immigration

Trump

Donald Trump has announced he will complete the wall on the Mexican US border which he started in his first term, whilst deporting millions of undocumented migrants. His party, the GOP (Grand Old Party), are running on a platform where they promise to end “a tidal wave of illegal aliens, deadly drugs, and migrant crime.” 

Harris

At the start of her term Vice President Harris was mandated to tackle immigration, however that has sadly failed as there has been a surge of migrants across the border. Indeed, under the Biden/Harris administration there has been a surge in border crossings culminating in December 2023 when in excess of 300,000 migrants crossed into the United States. However, in June 2024 these numbers finally fell after asylum restrictions came into effect. Kamala Harris has said very little on immigration policy, but has pledged to re-introduce legislation that will clamp down on border crossings. 

3. Housing

Trump

Former president Trump has proposed that if he wins the White House he will repurpose some federal land to build new homes, whilst promising to reduce the cost of homebuilding by severely reducing the amount of red tape. He also affirms that his policy on immigration will have the effect of reducing the purchase price of homes, making them much more affordable.

Harris

Like Donald Trump, Vice President Harris has also proposed repurposing some federal land to build new homes. Her platform also wants to help first time buyers with down payments on homes, proposing support of up to USD25,000. Furthermore, she has also proposed a fund with USD40 Billion to support innovations in home building whilst offering tax incentives to those builders who work on starter homes. Elsewhere, she is suggesting she will target certain landlords with new measures because they raise rents by utilising price-setting tools. 

There have been some negative comments by related market experts who advise that the United States has two problems in this area, lack of housing and affordability. They acknowledge that Harris’s proposals are to tackle both problems at the same time, however they feel her policies on housing will make purchases less affordable. Their reasons are fairly straightforward, as subsidies given to new home buyers will inevitably push up demand as building new homes will take time to deliver. As such, this will push the prices up and make it an increased pay-day for sellers. 

4. Inflation

Trump

One of Donald Trump’s major promises is to keep inflation low, and energy makes up a key part of this promise. Indeed, he argues that offering new land for drilling and tax relief on gas and oil producers, reducing the time it takes to obtain approvals for permits, licences, and pipelines, will boost oil and gas production and will help bring costs down. However, sceptics point out that unless the Republicans control congress it would be difficult to pass such legislation.

Harris

A lot of Vice President Harris’s rhetoric is all about middle-class families and lowering their costs. In the health care arena she is proposing a USD35 limit on insulin payments and on prescription drugs out of pocket costs will have an annual cap of USD2,000. Regarding groceries, Harris has proposed a federal ban on price gouging, whilst introducing new penalties for those companies who infringe, violate or flout pricing rules. These proposals have been greeted somewhat sceptically by certain economists and analysts. 

Experts note that since March 2020 food prices have risen by 25% making it more difficult for households to live. Data released show that over the past few years profit margins at grocery stores were fairly flat, meaning that these shops were raising prices in face of supply chain disruptions and rising costs, not gouging customers. 

To conclude

A number of experts and analysts suggest that, although Vice President Harris and former President Donald Trump come from vastly different places, both sides agree to deploying tariffs, stopping takeovers of US firms by foreign predators and above all running the largest deficits in the history of the United States, even when the economy is flourishing. As far as the election goes, once again America is deeply divided, it will be the swing states that call this election, and with only a short time to go, it is anybody’s guess. 

Will the US Dollar Continue to Decline?

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According to data supplied by Bloomberg’s Dollar Spot Index, the US Dollar has fallen just under 1% in September 2024, and is currently in the longest monthly losing streak since January 2023. Experts suggest that currency traders feel the US Dollar is in for more losses after the Federal Reserve cut interest rates by 50 basis points on 18th September, with analysts suggesting that sentiment is still bearish, with traders having already taken into account the impact of lower cost of borrowing. 

Since late June 2024, financial markets were getting more confident that the Federal Reserve would soon begin to cut interest rates and as a result the US Dollar Index has fallen by circa 3.6%. A downward trend that has continued since and since 18th September. With the United States election becoming imminent and the debate surrounding the rate cut intensifying, there are some strategists who are advising their clients to completely avoid the US Dollar. 

Data shows that markets and investors are engaging in more cross-currency exposure and giving the greenback a miss, so profits from trades such as buying GBP against the New Zealand Dollar or shorting the Swiss Franc against the Japanese Yen will be regardless of the outcome of the US election, or any fiscal policy announced by the Federal Reserve impacting the US Dollar.  Interestingly, data released by the BIS (Bank for International Settlements) reveals that on average the US Dollar accounts for one side of 88% of trades in a market valued at USD7.5 Trillion per day, so for the greenback to be avoided shows the uncertainty surrounding the currency.

Experts suggest that the US Dollar could well remain weak as the financial markets hunt for clues in economic data which might suggest the pace at which the Federal Reserve will cut interest rates. A number of analysts agree on a 25 (1/4 of 1%) basis points cut in November, however in the swaps markets experts are suggesting that there is a better than 50% chance of a bigger cut in rates. Therefore, the swaps markets feels that future interest rate movements are downwards, so fixed rate notes are betting on a bigger rate cut than 25 basis points.


However, as of 30th September, the Federal Reserve Chairman Jerome Powell adopted a more hawkish tone on the economy leaving financial markets, indicating that interest rates will only be cut by 25 basis points in November’s meeting. The dollar index rose .42% on the news, but as always the Federal Reserve’s decisions will be data driven, so it is still open season on whether the US Dollar continues its slide or not. Furthermore, analysts suggest that a Harris presidency will promote a stronger dollar whilst a Trump presidency will promote a weaker dollar.

Bitcoin Beats September Blues

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Bitcoin ,the original and most famous cryptocurrency, is currently enjoying a market capitalisation in excess of USD1.1 Trillion. The coin is having its best September ever due mainly to a swathe of interest rate cuts that were headlined by the Federal Reserve, who slightly surprised some parts of the financial markets with a full 50 basis point cut. This has helped Bitcoin show a gain of 10% in September 2024, which is in total contrast to previous Septembers stretching as far back 2014, where the average decline has been circa 5.9%. 

The correlation between the Federal Reserve’s monetary policy and Bitcoin is at its highest in comparison with other central banks monetary policies. A number of central banks, including the Federal Reserve, cut interest rates in September allowing investors to look elsewhere for returns bidding up many opportunities, including stocks, gold, and cryptocurrencies, while at the same time expecting further rate cuts in the near future.

Bitcoin is a decentralised asset and was originally a technology for payments, however today it is regarded as an investment, and a hedge against inflation. Over the years Bitcoin has, despite being subject to extreme volatility, experienced tremendous growth, and has recently outpaced gains in major stock indices, making it an attractive alternative to traditional portfolio investments. 

Furthermore, September gains have also benefited from US Spot Bitcoin ETFs (Exchange Traded Funds), which is gaining in attraction to both institutional and retail investors. Indeed, September 26th, 2024, the Bitcoin ETFs recorded a net daily inflow of USD365.57 Million, the largest inflow since the end of July this year. Data shows that since Bitcoin ETFs were launched, net inflows have reached an impressive level of USD18.31 Billion. Another factor that might have added to Bitcoin’s impressive September are the effects of April 24th halving* beginning to filter through.

Interestingly, a number of experts have advised that Bitcoin follows global liquidity trends 83% of the time over any twelve-month period, (more than any other asset class). They have highlighted that if on-chain Bitcoin metrics** are combined with global liquidity, it gives a deeper understanding of Bitcoin’s price cycles therefore opening up potential investment opportunities. 

*Bitcoin Halving – Halving or “The Halvening” occurs roughly every four years with the latest halving occurring on 20th April 2024. This event reduces the rate at which Bitcoins are created by 50%, which can potentially lead to price appreciation if demand remains constant or increases.

**On-Chain metrics – refer to data from a blockchain ledger that can be analysed to get a greater understanding of market sentiment and offers insights into various aspects of Bitcoins network health, economic activity and investment trends.

September 2024: The 2nd ECB Interest Rate Cuts

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For the second time in 2024 the ECB (European Central Bank) has cut interest rates by a ¼ of 1% (25 basis points) as inflation recedes towards their target of 2%. The key deposit rate was cut, as expected by most financial experts, to 3.5% despite the recovery facing some economic headwinds. Additionally, the refinancing rate (or minimum bid rate, is the interest rate which banks have to pay when borrowing money from the ECB) was cut by a full 60 basis points to 3.65%, a technical adjustment which had been on the cards for quite a while. 

The ECB President Christine Lagarde, like her peers in the United Kingdom and the United States, was quoted as saying “we shall remain data-dependent” and going on to add that the decision to cut interest rates was totally unanimous. The President was further quoted as saying “A declining path is not predetermined, neither in terms of sequence, nor in terms of volume”. A number of analysts surmised that this is financial speak for ‘We may or may not be doing another rate cut this year and we are therefore not going to commit ourselves.’ Financial markets slightly eased back on bets on further monetary easing predicting a total, predicting a circa 36 basis points increase by the end of Q4, though there is no complete consensus.  

The interest rate announcement by the ECB follows a fall in inflation in August to 2.2% with data released showing wage increases which drive price increases in the service sector are now on the decline. A comprehensive measure of workers’ pay, the “Compensation Per Employee”, provided data showing an easing to 4.3% in Q2 from 4.8% in Q1. The ECB President stressed that their inflation target of 2% should be reached by the end of Q4 2025. However, as in a number of other economies, service inflation is still on the radar as being one of the main concerns. 

Despite the sluggish growth in the euro zone’s 20- nation economy, where declining momentum from earlier in the year (households are not supporting the rebound in Q1 and figures for manufacturers remain indifferent), many analysts suggest that there is a predictable outlook to interest rate cuts. Whilst many analysts see an interest rate cut in each of the upcoming quarters until end of Q4 2025, there are some doubts due to the weak economy, which is the justification for the ECB remaining on the fence regarding the timing of future rate cuts. 

The Declining Value of the US Dollar

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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 (20th  – 22nd 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 18th, 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.

The Underlying Problems in the Russian Economy

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Despite over 1,000 global multinational corporations leaving the country plus sanctions being imposed, the Russian leadership has been “bigging up” the economy, but do their words really ring true? On closer inspection the apparent economic feel-good factor is down to the Russian government massively overspending, which has hidden restrictive monetary policy from the populous using intense fiscal stimulus. All is not rosy in the economic garden of Russia as experts suggest that the government is engaged in a spending spree that is completely unsustainable.

Analysts have shown that most of Russia’s human, production and financial resources have all been redirected to the defence sector in order to finance the President’s war with the Ukraine. This has left the civilian sector exceptionally short of resources, who have been struggling to meet the increasing demand from the consumer sector. Sadly, the disparity that now reigns within the Russian economy (funding the war at the expense of the rest of the economy) has seen inflation jump with added pressure coming from increasing costs of imports and the depreciation of the rouble. The prioritisation of military spending over everything else is essentially stifling innovation and damping down any long-term growth prospects.

Analysts suggest that Russia is indeed running out of reserves and estimate that the amount of liquid assets available for distribution is just shy of USD100 Billion. This shows that the war is eating heavily into Russian reserves built up from oil revenues in the first decade of the 21st century, despite new levies and increases in taxes across the whole economy. The largest contributor to revenue has, without a doubt, been the oil and gas sector, where experts estimate such contributions amount to circa 33% of total revenues. Regarding tax, a mineral extraction tax has been levied on the giants of the oil and gas industry and their only LNG producer Novatek now faces an increase in its corporate tax rate from 20% to 34%. Furthermore the Russian government will from January 1st, 2025, increase the overall corporate tax rate from 20% to 25%, the war effort now creeping into the bottom lines of all major Russian corporations. 

The tax measures being taken by the Russian government in itself is not totally ruinous, but when combined with the withdrawal of virtually all global multinationals and sanctions it’s clear they are ruining any chances of critical investment vital to the future of the Russian economy. A number of key development projects such as the Arctic LNG-2* have been brought to a halt due to the lack of investment and the withdrawal of key international companies. The war effort is bleeding the private sector dry, especially in the area of wages, where they cannot compete with the defence sector.

*Arctic LNG-2 – Novatek reported that there had been a massive increase in capital expenditure of USD$4 Billion on this project as they had to turn to Chinese replacements of western equipment. Due to the virtual total withdrawal of international companies (Baker Hughes, Linde and Technip along with sanctions), this project has now come to a complete standstill. 

Despite the political rhetoric, China has ceased helping Russia on the financial front with analysts advising that circa 80% of Russian transactions in Yuan are being reversed as fear of secondary sanctions have scared off Chinese financial institutions indicating the reluctance of engaging with Russia. Furthermore, experts report that important direct commodity payments between Russia and China are being frozen. On top of this interest rates are currently 18% and not stopping inflation. Government financial experts had expected with interest rates so high Indian and Chinese investors would flock to the marketplace, but such thinking is flawed as Russian assets are regarded as toxic. Finally, Russia is banned from the international capital markets so has no chance of raising funds from the global debt and equity markets. At this rate the entire financial structure of the Russian economy will become destabilised, and who knows what a bankrupt President Putin would do to alleviate the situation. 

Are Global Markets Facing a New Period of Volatility?

Written by IntaCapital Swiss on . Posted in News & Reports. Leave a Comment

On Monday 5th 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.

Global Financial Markets Rethink

Written by IntaCapital Swiss on . Posted in Blog Article, News & Reports, Uncategorized. Leave a Comment

Expert financial analysts are suggesting that many of the presumptions that have driven the global financial markets in 2024 are quickly being rethought. Speculation that the Federal Reserve may well cut interest rates faster than predicted has given way to doubt over the economy of the United States, prompting investors to redeploy their investments in the currency and bond markets. The shift in sentiment has also been driven by a slew of disappointing results in corporate earnings, together with scepticism from shareholders that the huge investments in AI* (artificial intelligence) by tech companies may not pay off as soon as was originally expected. 

Indeed, analysts advise how investors were caught by surprise when results for Alphabet Inc (google parent) showed how much had been invested in technology, but any returns were not reflected in the revenue figures. Interestingly, while still up 12%, this year the Nasdaq 100 index has fallen circa 9% from its record high on July 10th, wiping out USD23 Trillion from its market value. Many experts have pronounced that the AI frenzy no longer looks as positive as it was before. 

*Artificial Intelligence – The bull market up to June 2024 has boosted the S&P 500 market capitalisation by USD9 Trillion (fuelled by AI stocks) since the Federal Reserve pivoted away from rate hikes in August 2023. Experts advise that performance is extremely concentrated in a few mega-cap names and could make the effect of any major decline in big tech stocks more pronounced.

Another example of the “rethink” is where investors have been borrowing in low yielding yen to invest in higher yields such as the Mexican Peso, the New Zealand Dollar, and the Australian Dollar. However, it appears that these transactions are a thing of the past as the gap between the BOJ’s (Bank of Japan) and its counterparts is set to come closer to each other.  Elsewhere, experts advise that the European and United States Equity markets in 2024 have been driven by the general agreement that inflation was slowly coming under control, however they feel that now the US economy is becoming weaker and weaker, changing the perception towards equities. 

In Sub-Saharan Africa, analysts advise that a somewhat laboured return to the international capital markets has run straight into a stop sign basically due to uncertainty over the November presidential election which has given global investors the jitters. There are 49 governments in the region and only five (Benin, Cameroon, Ivory Coast, Kenya, and Senegal) have managed to sell US Dollar bonds in 2024 in a combined amount of USD6.2 Billion which is much lower for the same period in 2022*. In fact those countries within emerging markets will see high yield borrowings classed as higher risk if former President Donald Trump wins the upcoming election, as experts feel he will favour fiscal expansion negating any reduction in the already high global borrowing costs.

*Sub Saharan Africa – The whole region was denied access to overseas capital for two years due to rising global interest rates and the devastation of war. 

As the US election approaches, it will be interesting to see how the different markets react, though currently there seems to be a massive “rethink” to how global markets will be driven. Whoever wins the White House, it appears that investor sentiment at least for the being is moving to safer havens.

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