In light of last week’s events surrounding markets and Brexit talk, Rebecca O’Keeffe, Head of Investment at interactive investor comments for Finance Monthly.
There is no doubt that President Trump has been highly positive for US equity markets, which has fed through to rising global markets, but his increasingly erratic behaviour is making it very difficult for investors to work out whether he remains a friend or foe. His America first policy is designed to play well at home, but in classifying the rest of the world as competitors rather than allies, he has increased tensions and raised geopolitical risks for investors.
Bank of America, Blackrock and Netflix all report second quarter earnings today, which may provide further clarity for financials and the outperforming technology sector. Mixed results from three of the big US banks on Friday saw bank stocks fall, so today’s figures from Bank of America should provide further clarity for financials. Technology stocks have been the place to be invested in the first half of the year with the Nasdaq up over 13% compared to relatively flat performance elsewhere. The first of the FANGS to report, Netflix earnings are hugely important for investors to confirm whether the outperformance of technology stocks is warranted or if the market has got ahead of itself.
Calls for a second referendum and a coordinated effort by Brexiteers to undermine Theresa May’s policy and position means this could be a make or break week for the Prime Minister. Having set out a radical plan to seek what she believes is the best possible deal for the UK economy, Theresa May must now try to sell the deal to parliament this week. The hard-line Brexiteers have already indicated their objections, but they could also instigate a direct challenge to May’s leadership if they can secure the 48 Tory MP signatures necessary for a leadership ballot. After months of failed negotiations and an increasingly divisive government, this week is pivotal for Theresa May.
Trump’s escalation of the trade war is going to trigger a “chain reaction of negative events around the world,” says Nigel Green, the founder and CEO of deVere Group.
This warning comes as global markets are in turmoil as Donald Trump’s administration announced a long list of new products that tariffs on $200 billion worth of goods from China will be levied against.
Mr Green comments: “Trump’s escalation of the trade war between the world’s two largest economies is going to trigger a chain reaction of negative events around the world.
“It is going to lead to higher inflation in the U.S, as import tariffs raise the cost of imported goods while domestic producers find that they can increase their prices as foreign competition weakens. This means interest rates will be hiked and the dollar will go up.”
He explains: “China’s cheap goods have helped keep prices, and therefore US and global inflation, low.
“To counteract increasing inflation, the US Federal Reserve is even more likely to raise interest rates. A jump in rates will, of course, strengthen the dollar.
“A stronger dollar also increases stress in emerging markets, many of which have borrowed heavily in recent years in dollars and who now find interest and capital repayments on these loans have shot up in local currency terms. In addition, emerging markets are particularly vulnerable to a downturn in exports resulting from a rise in quotas and import by the US, given that exports are a key driver of growth for many under-developed countries with China the most obvious example’.
Mr Green goes on to say: “Trump’s trade war is a masterclass in self harm for the US and global economy.”
The deVere CEO stated last week that investors must now avoid complacency and ensure their portfolios are properly diversified to mitigate risks and take advantage of potential opportunities that all bouts of market volatility bring.
He said: “Investors need to brace themselves for months of heightened posturing from the different parties, which is likely to increase market turbulence.
“And as Trump potentially marches off to a trade war, a good fund manager will help investors sidestep the risks and embrace potential opportunities.”
(Source: deVere group)
As the trading week gets under-way, once again it is the political world that has the attention of markets. Below David Jones, Chief Market Strategist at Capital.com, discusses his thoughts on this week’s markets.
The decision by the UK's Brexit Secretary David Davis to resign late on Sunday evening may have been expected to unsettle some - but that hasn't been the case so far. At mid-morning, the UK stock market was slightly higher and that Brexit-barometer - the pound - was trading at its best levels for almost a month. At first glance, this rise might seem somewhat illogical. But traders seem to be taking the weekend discussions and Davis's resignation as the sign that a soft Brexit could be on the cards - although the resignation does not exactly add much stability to Prime Minister May's government.
Politics is likely to be making the headlines for the rest of the week as US President Trump visits the UK. But it's another important week for the US markets as it is the start of earnings season. It kicks off on Tuesday with Pepsico but the main focus is likely to be Friday when the banks such as JP Morgan and Citigroup reveal how the last quarter was for their businesses. Expectations are running high that the last three months have been good ones - any misses here could well dent the near 105% recovery US stocks have enjoyed over the past three months.
In other markets, oil remains just below its recent three and a half year high. The last 12 months have seen the crude price rise by 70%, with little impact so far on the bigger economic picture. It does feel as if something needs to give here - $100 a barrel oil would surely start to slow down the world economy, but for now at least any dips in the price of crude just serve to fuel more buying.
(Source: Capital.com)
In life we generally want to be right. This is why you may hear traders framing their trading success by saying they won nine out of the last 10 trades, or that they have a 90% success rate.
However, having lots of winning trades does not necessarily mean that you will be a profitable trader in the long run. This concept is Ray Downer, Senior Trader Coach at Learn to Trade, explores below as he talks Finance Monthly through trade expectancies.
Let’s take two traders: Sarah and Mike are both traders that have placed 100 trades and started with the same amount of money in their trading account:
Who is the better trader?
Although we can see Mike is right more often than Sarah is when trading, to determine who is the better overall trader we are missing some key pieces of information.
Firstly, we need to know the amount of profit made when one of our traders is right, as well as the amount lost when wrong. Another way of putting this is that we need to know our traders’ average reward-to-risk over their 100 trades.
So let us look at both of our traders again, but this time take into consideration their reward-to-risk:
This gives us a bit more insight into the traders. We can see that mike, for example, is willing to risk three times more than he stands to gain in any one trade. Sarah in contrast is looking for a bigger pay-off but not willing to risk as much as Mike per trade.
Neither of those approaches is inherently good or bad as a trading strategy.
To really understand how each of our traders’ strategies stack up against each other, we need to take into consideration the two things we have mentioned here: firstly how frequently our traders have winning trades and secondly how much is gained or lost with each trade.
In trading terms, what we are figuring out is Mike and Sarah’s trade expectancy. Trade expectancy essentially tells us how much we stand to gain or lose as a trader for every pound risked.
Expectancy = (average gain x probability of gain) – (average loss x probability of loss)
We can make this a bit clearer using Mike and Sarah’s results:
What this tells us is that over the long run Mike is breaking even with each trade despite winning 75% of the time. As a trader the long term goal is of course to make a profit rather than break-even or lose money. For Mike’s strategy to become profitable he either needs to win more often and/or reduce his risk per trade.
Sarah’s expectancy tells us that she is making an average £20 per trade in the long run, even though she is winning just 30% of her trades. Her reward-to-risk strategy means that she can be wrong much more frequently than Mike, but still make a profit overall.
Both Mike and Sarah’s expectancy can improve or worsen depending on trading conditions and whether they stick to their trading plans. Nevertheless, expectancy is a good benchmark to evaluate a trading strategy. You could also think of expectancy as how much you can theoretically expect to get paid for each trade you take over time.
As we all know, it’s impossible to always be right when trading forex. However, figuring out your expectancy helps shift focus away from being right per trade to instead how right you are overall.
CNN's Jon Sarlin explains how Uber moved into the biggest market in the country and defeated the formidable yellow cab industry.
In January this year, Trump slapped tariffs of up to 30% on imports. In March, he added tariffs of 25% and 10% on imported steel and aluminium respectively. China and the EU retaliated with actual or threatened tariffs on hundreds of imported US products, but Trump hit back with a threat of further taxes.
Companies and investors caught in the cross-fire between tit-for-tat trade wars are concerned because:
The Financial Times suggests that a global trade war could knock 1-3% off GDP over a few years. They also reported that whereas capital expenditure (capex) by some US companies had risen, a Credit Suisse survey suggested that many businesses remained more hesitant about investing. Some have opted to hold onto their mountains of cash because of the uncertain outlook caused by trade war and geo-political tensions.
Capex
With reduced capex comes reduced employment and reduced productivity gains. Inefficiency eats into profit margins and competitiveness, lowering company values and economic growth, which leads to less capex, and so the vicious downward spiral continues.
Some companies might manage the situation by shifting production overseas, but in the process losing exported jobs. Relocation would also consume investment and time to raise production and adjust to the new dynamic, and in the meantime, the profit margin would diminish.
Uncertainty
A great drag on companies’ profits and a disruptive influence on supply chains, is the uncertainty that trade wars create. When will they end? Will they escalate? Which sectors will be affected and to what extent?
Chinese parts, for example, relied upon by US manufacturers, could become unavailable, or they might not. Just a month later, the US is backpedalling on its April 2018 ban on selling US company parts to Chinese company ZTE, a reversal that will cause turmoil among exporters and importers that must now reverse their plans to circumvent the ban.
Governments might retaliate to their counterparts in other ways. In 2016, China shut down Korean companies operating in China in retaliation to South Korea's actions. Hyundai and Lotte (both Korean) were denied car parts from local suppliers and 100 Lotte shops were closed. Countries have been known to expropriate foreign companies’ assets.
In the aftermath of the 2007 global financial crisis, investors stood on the sidelines for years with their pockets full of cash until asset prices and markets stabilised from the shock. The same hesitation could occur during trade wars and other geopolitical crises.
Higher funding costs
We have already seen some shareholders switching out of volatile equity investments into safer havens such as government bonds. That is likely to raise yields for borrowers, especially for high-yield borrowers, increasing interest payments and lowering corporate profits.
Currency risk
Investors’ flight to safety could significantly impact exchange rates as they dump risky currencies (such as those of some emerging market countries) and buy safer ones (such as USD), causing currency losses for companies that have not hedged their currency risks. Conversely, companies with a depreciating currency could benefit – for example, from the increase in value of overseas earnings that are reported in the depreciating currency. Those gains could be offset more or less, by higher import costs.
The IMF reckons that (without trade retaliation) the USD could appreciate by 5%. Appreciation of the USD could accelerate, causing further rises in costs of USD-denominated commodities, such as oil.
Commodity prices
Higher oil prices would adversely affect heavy users of energy, such as aviation, motoring, and manufacturing sectors. For example, American Airlines’ share price went down 6% after it expected $2.3 billion in additional fuel costs.
Winners and losers are expected from conflicts, such as trade wars, but sometimes the outcome can be unexpected.
Unintended consequences
American company Metal Box International was going to shut down after its sales had been decimated by cheap imports, but Trump’s protectionist trade policies changed its mind.
Metal Box, and other US manufacturers of products slapped with US import duties, should have seen its market sales rise as it filled the market gap created by reduced imports.
Anti-subsidy and anti-dumping duties imposed by the US on Chinese imports did result in a pick-up in Metal Box’s sales, but it was short-lived, because, according to the company, consumers and retailers feared trade war disruption so they stocked up pre-emptively. The company increased its capex in anticipation of higher sales volumes, but the machinery now sits idle.
The company’s hopes for business success were set back further by tariffs imposed by Trump on imported steel, because the company will now probably have higher costs of steel raw material.
Stagflation and GDP
Moody’s notes that workers employed by US business sectors that use steel far outnumber those employed in its manufacture, by around 5:1. That is also the ratio of job losses: gains predicted by Trade Partnership as a consequence of US tariffs.
“Protectionist trade policies, including tariffs on raw-material imports, could exacerbate these inflationary pressures [caused by global economic growth], running the risk of tighter margins and possible supply-chain disruptions in the manufacturing sector,” said Moody’s. Inflation could necessitate faster monetary policy tightening, i.e., more interest rate hikes. That would raise companies’ costs, denting their profits.
Sustained high interest rates and inflation could stymie global economic growth and create stagflation. A March survey by BoAML found that 90% of investment managers thought protectionism would cause either inflation or stagflation, and protectionism was investors’ primary fear.
Whereas some steel users will have the ability to pass on rising metal costs (either contractually, or through their brute forces of negotiating or price-setting), smaller companies will have to absorb higher input costs to maintain market share. For the former, profit margins will be protected, for the latter, they will contract.
Where investors are concerned, borrowers also need to be concerned, because the fortunes of both are intertwined. When investors become risk-averse and hoard cash, borrowers lose access to capital or pay a higher cost. Reduced profits ultimately hurt workers’ incomes, the economy’s GDP, and investors’ return on investment.
Unchecked, stagflation could deteriorate into recession, leading to job losses, reduced investment and further corporate financial distress. With many companies and individuals already highly geared with debt, a recession or stagflation that reduces income and the ability to service debt interest obligations, could trigger a wave of personal bankruptcies or corporate insolvencies, reducing GDP further and leading potentially to recession.
Companies might have to lay off employees to remain profitable or in business. Where last-in-first-out stock valuation accounting policies are used, profits will be quickly dented, reflecting higher stock costs. Cashflow will fall because of more expensive stock, or else companies will try to stretch their trade creditors’ goodwill even farther. Companies that can control their working capital interactions are more likely to survive than those with poor credit, stock, and trade creditor management practices.
Credit insurance
Companies’ trade credit insurance premia might increase, or be stopped of their financial position deteriorates. Credit insurance providers stopped providing credit protection to Woolworths’ suppliers, meaning it had to pay in cash, exacerbating the strain of its debt pile and leading to its administration. Without credit insurance, factoring of invoices, and conventional credit from suppliers, Toys R Us had to buy its games and toys as they were delivered. Without cash, a company’s shelves soon begin to empty, payments become overdue, staff are not paid, and operations grind to a halt, i.e., bankruptcy or insolvency ensues.
Gearing
Companies that have low gearing or operate in strong cashflow sectors such as fast-moving consumer groups, might withstand a cash crisis by raising additional debt, but companies already creaking under a mountain of debt and/or debtors, are more likely to break under the strain, and relatively sooner.
Almost 2/3 of aluminium and 1/3 of steel are imported by the US. Caterpillar and Boeing were caught in the firing line between the US and its trading partners because of their heavy and critical reliance on metals, and their international operations. Investors realised the negative implications so both companies’ shares dumped, sending their prices down more than 5%.
Winners and losers
Shareholders in US steel makers made a mint from US tariffs, US Steel and AK Steel, for example, rose 6% and 10% respectively. In the longer-term, US steelmakers could lose out from trade wars, however, for example, if manufacturers relocate, cut back on domestic production volumes, or use alternatives materials.
Other winners in the latest trade spat are companies that are more inward-looking or resilient to tit-for-tat retaliation, such as healthcare and BioTech. For example, shareholders in Johnson & Johnson, Merck, and Pfizer were some of the biggest winners in March. Other defensive regions and sectors include: Australia, Brazil, parts of Europe and Japan, and sectors such as telecoms, utilities, insurance, and retail. Countries whose GDP depends heavily on exports to the US, such as Mexico and Canada, are likely to suffer most from US protectionism.
Conclusion
Companies are in the cross-fire between trading countries, so they need to, above all, pay close attention to their cash flow and their survival over the longer term, even at the expense of near-term profit and revenues. They also need to monitor a changing geopolitical landscape and adapt accordingly. At such times, a company is likely to soon find out how committed banks and other investors really are to the company’s survival.
Website: www.permjitsingh.com
Investors need to avoid complacency as Trump potentially marches off to a multiple front trade war, warns deVere Group’s boss.
The warning from Nigel Green, founder and CEO of deVere Group come as worries of a trade war between the US and China have further increased, causing markets to slide around the world. The fears intensified after it emerged that President Trump is preparing a new crackdown on Chinese investments in America.
Mr Green comments: “Up until now the markets have been remarkably nonchalant regarding the escalating tensions between the world’s two biggest economies over the last couple of months.
“However, as the Trump administration sets out increasingly aggressive restrictions on what they see as China’s unfair trade practices, and because Trump is on the trade offensive on many fronts, including against traditional U.S. allies, the worries are now becoming much more focused.”
He continues: “There really hasn’t been any major asset class or any part of the world Trump hasn’t spoken out against in recent weeks. As such, if investors are serious about growing and safeguarding their wealth, complacency should no longer be an option. Vigilance is crucial.
“Now is the time for investors to ensure that their portfolios are properly diversified.
“As history teaches us, diversification is the best way an investor can position themselves to mitigate risks - and also, importantly, to benefit from the buying opportunities that all bouts of market volatility present.”
Mr Green goes on to add: “It is likely that Mr Trump’s bombastic tactics are just negotiating strategies and he will not totally overhaul and/or disrupt trade patterns.
“However, due to the scope and depth of the potential fall out of a U.S.-led trade war on international trade and global growth, investors should be actively looking to review and, if necessary, rebalance their portfolios.”
The deVere CEO concludes: “Investors need to brace themselves for months of heightened posturing from the different parties, which is likely to increase market turbulence.
“And as Trump potentially marches off to a trade war, a good fund manager will help investors sidestep the risks and embrace potential opportunities.”
(Source: deVere Group)
Last week, stock markets fell globally in the wake of US President Trump's latest tariffs threats to China. Donald Trump threatened to put tariffs on an extra $200bn (£141bn) of Chinese goods, further fueling the prospects and worries of a trade war.
This week Finance Monthly set out to hear Your Thoughts on the potential for an international trade war, gaging the opinions of experts and professionals around the world.
We asked them: What do you think about this? How will this change things internationally? What might be the short-term reactions and impacts? What about the long term? How will you be affected? How will small businesses be affected? Who will benefit from what's to come? Is this a good strategy? What are the political and social repercussions?
Miles Eakers, Chief Market Analyst, Centtrip:
Investors are right to be concerned as Wall Street futures dropped by almost 2% following Trump’s threats to impose more tariffs. Any retaliation by Beijing is likely to fuel the escalating trade war with Washington, which will in turn have a negative impact on equities and increase risk aversion.
Investors are not the only ones troubled by the current situation. The world’s largest superpowers’ shift towards protectionism has global ramifications. International companies may grow less competitive due to tariffs and the cost of raw materials purchased overseas could rise by 10–20%. It’s highly possible that any further action from the US or China could put an end to the current 10-year bull market run.
Kasim Zafar, Portfolio Manager, EQ Investors:
An all-out trade war is unlikely and we believe this will be avoided in favour of mutually agreeable changes on both sides.
The world last entered trade wars on this scale early during the Great Depression. The Smoot-Hawley Tariff was entered into US law in June 1930, about 8 months after the “great crash”. There are mixed opinions on whether the tariffs added to the economic depression or only slowed down the ensuing recovery. But it is generally agreed the tariffs themselves were not the main cause of the Great Depression
Today there are few, if any, of the conditions that presaged the Great Depression. But the world is a different place today compared to the 1930’s. The most significant difference is the interconnected nature of global supply chains that have been built by companies in the post-War era. Abrupt changes along the supply chain in terms of physical supply or associated cost will have immediate impacts on the total costs of production. Companies are not charities, so if the cost of production goes up, so too will product prices on the shelf.
The impacts will differ between companies and across nations dependent upon:
The UK runs a goods deficit of over £130 billion per annum of which about 10% is with the US directly. So for the average UK consumer, the direct implication of US originated tariffs on items we buy is fairly limited in scope. The impact of tariffs on things we sell is limited also with only about 10% of UK exports heading for the US directly. The bigger risk we face is the secondary impacts from companies and countries that are impacted to a higher degree:
Carlo Alberto De Casa, Chief Analyst, ActivTrades:
The trade war escalation is unsurprisingly scaring the markets. The main reason for this is actually the belief that this is only the beginning of the escalation, as China has already clarified that it will reply to US tariffs with its own. Of course, this could have many impacts. In the short term, US companies which are importing will have to pay more, while advantages for US producers will be positive, even if that’s a much smaller proportion overall. But what is scaring markets is definitely the long-term scenario, that the trade war will grow to affect more economical sectors.
This won’t only affect the big companies, it could also have a serious impact on smaller ones and retail consumers. A typical example to explain this is something like the beer can, the cost of which will rise due to the aluminum tariffs. The implications can be far wider than what you might originally think.
It is difficult to say whether this is a good strategy; we can surely affirm that this is a risky strategy as you can’t completely predict or control the effects it will have, especially in the long term. The ball is now firmly in the court of those who trade with America.
There’s little certainty that this will help drive the US economy. If this is the effect wanted by Donald Trump, then you have to consider that the tariffs which will be decided by other countries are what will drive the results. It could at best create jobs in one sector, but the additional jobs generated will likely result in a loss in other sectors. Overall, it’s hard to see this policy accomplishing its goals.
Bodhi Ganguli, Chief Economist, Dun & Bradstreet:
Rising protectionist measures from the US government are creating significant uncertainty for global businesses and adding to cross-border risks. After some optimism that the US hardline stance on tariffs was softening a bit, new announcements from the administration have re-ignited fears that the ongoing skirmishes could blow up into a full-fledged trade war, particularly between the US and China. The latest announcement came from President Trump on 22nd June when he threatened to impose new tariffs of 20% on auto imports from the EU unless the EU removed tariffs on US goods. It should be noted that, some of these EU tariffs on US exports went into effect earlier the same day; these were retaliatory tariffs in response to US tariffs already implemented on steel and aluminum (most trading partners were exempted, except the EU, Canada and Mexico). Equity prices of major European automakers dropped immediately following the announcement, highlighting the intricacies of global supply chains and their dependence on smooth trade flows between nations. In fact, all major global stock markets have seen episodes of selloffs in the past few weeks in reaction to worries that trade restrictions are rising.
The latest round of proposed US barriers to free trade have come with a pronounced inclination by the US to move away from traditional norms of multilateralism based on the WTO principles, including measures specifically directed at longtime allies like the EU and Canada. This has the potential to spill over into other areas of geopolitical risk, and pose added headwinds to the global economy. While the extent of the EU retaliation is modest so far, other countries are stepping up or planning ‘tit-for-tat’ tariffs against the US. India just hiked tariffs on a selection of US goods, while similar Canadian tariffs are scheduled to come into effect on 1st July. Of course, the biggest risk of disruption comes from the US-China spat; earlier the same week, China threatened to hit back with a combination of quantitative and qualitative measures after President Trump ordered his team to identify USD200b in Chinese imports for additional tariffs of 10% with provision for another USD200b after that if China retaliates. The global economy is still expanding; although divergences in policy are signaling desynchronization in the near term, it can still withstand some fluctuations in equity indexes. But the bigger underlying risk is that if the trade rhetoric does not die down, or if it becomes a significant headwind, stock markets will face sustained downward trends as investor confidence is impaired, eventually leading to a spillover into the real economy.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
In May, US President Trump signed an overhaul to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Below Kerim Derhalli, CEO and founder of investment app Invstr, looks at the success of the bill and the potential impact of the changes.
While he may be often controversial, there’s no arguing that the most recent President of the United States hasn’t shied away from pushing through the issues that are close to his heart.
The rollback to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is a latest personal win for Donald Trump as he aims to deliver on his promise of reversing a number of Barack Obama’s policies. Whether Obamacare or foreign policy, he is making inroads into unravelling the legacy of his predecessor.
But is the Dodd-Frank rollback the right move, and is this the right time?
In 2010, the American public was crying out for Dodd-Frank. The bill sent through the Senate came in the midst of the financial crash; people were broke and the sector was in turmoil. ‘Regulation’ was the watchword – reckless bankers must be brought under control – and so they were.
For the past eight years, Dodd-Frank has broadly been a success in achieving what it was set out to do – avoiding a repeat of the 2008 financial crisis by regulating the growth and proliferation of “too-big-to-fail banks”.
Beyond playing its part in making banks more accountable, if you look at any raft of metrics and studies, economic stability has returned to the US. How much of this is directly down to Dodd-Frank is a debate that can be argued either way.
One of the big wins for consumers that did come out of Dodd-Frank was the Consumer Financial Protection Bureau (CFPB) which, since its inception, has returned almost $15 billion dollars to more than 30 million Americans wronged by the finance industry.
It hasn’t all been rosy however. Larger ‘small’ banks in particular suffered under the regulation, which demanded tough and restrictive capital and planning requirements. In the views of many, this has stifled growth and the bipartisan bill to roll back Dodd-Frank seeks to remedy this.
The move lifts the threshold at which banks are deemed too big to fail to $250bn – a fivefold increase – and releases smaller and medium sized banks from stricter capital and planning requirements.
Since 2008, small banks have been overwhelmed by the complexity of the bill, leading to the loss of many community banks and credit unions across the United States. These small banks are a lifeblood to the US economy – responsible for nearly half of all small business loans and 15% of residential mortgages.
As well as this, the Federal Reserve have been virtually stripped of their ability to respond to further financial crises. This is primarily due to the law’s stipulations that the Fed’s lending must be broad-based and not directed towards single institutions.
The biggest hint at the bill’s demise came when one of the law’s architects themselves, Barry Frank, noted that he saw ‘areas where the law could be eased’.
So, what now? Is this the start of a return to that Wild West of overleveraged lending – are we back on the merry-go-round of bust and boom?
The short answer is ‘no’.
While it is difficult to forecast exactly how the US financial sector will be reshaped following the bill, with jobs on the rise in the United States, spending power also broadly in growth, and with the economy in relatively good shape, it does seem like the time is right for change.
We’re also in a very different world from 2008. The last decade has been an explosion of access to information and consumers are increasingly empowered to cut out intermediaries and take a more proactive approach to their finances. Trust in finance institutions continues to be at a critical low and, nowadays, Joe Public is in no mood for manipulation.
Social media means we now have access to more information – and outlets for outrage – than we ever had before. If the banks take any liberties, they’ll have nowhere to hide, and competition is fiercer than ever with the rise of disruptive challenger banks and fintech platforms.
The global economy remains on a tentative road to growth, but the fact that we’re not booming also means that there are not tidal waves of opportunity for the banks to surf on, either. In the world of finance, we are now more risk averse and nervous of the repercussions of failure.
Within this wider social and economic environment, it would appear that the rollback is the right move, and at the right time. The measures that remain in place are strong, but the concessions also look reasonable. We’re not mourning the demise of the Dodd-Frank bill – we can look forward with excitement to its future.
US President Donald Trump and Canadian Prime Minister Justin Trudeau were all jokes and smiles for the media as they met at the Group of Seven leaders summit in Quebec on Friday, but neither budged on the serious trade dispute between them.
In light of Donald Trump’s dramatic withdrawal from the Iran Nuclear Deal, Katina Hristova examines how the pullout can affect the global economy.
As with anything that he isn’t fond of, US President Donald Trump hasn’t been hiding his feelings towards the Joint Comprehensive Plan of Action between Iran and the five permanent members of The United Nations Security Council plus Germany. Pulling the US out of the agreement on the nuclear programme of Iran, which was signed during Obama's time in office, is something that Trump has been threatening to do since his 2016 election campaign. And he’s only gone and done it. Earlier this month, he announced America’s immediate withdrawal, saying that the US will reimpose sweeping sanctions on Iran’s oil sector and that “Any nation that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States”. And as if this isn’t alarming enough, President Trump has also said that the US will require companies to ‘wind down’ existing contracts with Iran, which currently ranks second in the world in natural gas reserves and fourth in proven crude oil reserve, in either 90 days or 180 days. This would hinder new contracts with Iran, as well as any business operations in the country.
Since Washington’s announcement, signatories of the Iran Nuclear Deal, still committed to the agreement, have embarked on a diplomatic marathon to keep the deal alive. On 25 May, Iran, France, Britain, Germany, China and Russia met in Vienna in a bid to save the agreement.
So how will this hurt the global economy?
Deals worth billions of dollars signed by international companies with Iran are currently hanging by a thread. The main concern on a global scale is that the US’ decision threatens to cut off a proportion of the world’s crude oil supply, which has already resulted in an increase in oil prices, with crude topping $70 a barrel for the first time in four years.
Additionally, European companies like Airbus, Total, Renault and Siemens could face fines if they continue doing business with Iran. Royal Dutch Shell, who is investing in the Iranian energy sector, is potentially one of the biggest companies to be affected by Trump’s withdrawal which could put billions of dollars’ worth of trade in jeopardy. As The Guardian points out: “In December 2016, Royal Dutch Shell signed a provisional agreement to develop the Iranian oil and gas fields in South Azadegan, Yadavaran and Kish. While drilling is still a long way off, sanctions are likely to put any preparations already being made on ice.”
French company Total, who’s involved in developing the South Pars field, the world’s largest gas field in Iran, is in a similar situation.
Airbus and Boeing, two of the key players in the international aviation industry, have signed contracts worth $39 billion to sell aircraft to Iran. As The Guardian reports, the most significant deal is an agreement by IranAir to buy 100 aircraft from Airbus.
A spokesman from Airbus said that jobs would not be affected. “Our [order] backlog stands at more than 7,100 aircraft, this translates into some nine years of production at current rates. We’re carefully analysing the announcement and will be evaluating next steps consistent with our internal policies and in full compliance with sanctions and export control regulations. This will take some time”. Rolls Royce is also expected to be indirectly affected if Airbus loses its IranAir order, as the company is the key engines provider to many of those aircraft models.
Another European company that will be hurt by the sanctions announcement is French Renault and PSA, who owns Peugeot, Citroën and Vauxhall. When sanctions were lifted back in 2016, Renault signed a joint venture agreement with the Industrial Development & Renovation Organization of Iran (IDRO) and local vehicle importer Parto Negin Naseh, worth $778 million, to make up to 150,000 cars in Iran every year. This is one of the largest non-oil deals in Iran since sanctions on the country were lifted. Last year, local firm Iran Khodro also signed a deal with the trucks division of Mercedes-Benz, with car production scheduled for this year.
Iranian firm HiWEB has been working alongside Vodafone to modernise the country’s internet infrastructure, but it looks like the partnership will have to be reconsidered.
The consequences
The White House and President Trump appear aware of the danger that a rise in oil prices on an international level pose to the economic growth of the Trump era, however, they also seem ready to embrace the economic and geopolitical challenges that are to follow. Although the consequences of US’ Iran Deal pullout are not perfectly clear in the short term, they will undoubtedly become more visible as sanctions take effect. The deal has its flaws, however, completely withdrawing from it and threatening the US’ closest allies can only compound those issues and create new ones. It is hard to predict what will unfold from here and where Trump’s strategy will take us. The one thing that is certain though is that the world doesn’t need more hostility.
Is globalised trade in reverse? Is protectionism on the rise with the potential of a spreading trade war? These are questions at the top of many business leaders’ minds. The answer to both these questions is yes, and business models are going to have to change as a result. Dr Joe Zammit-Lucia, co-author of ‘Backlash: Saving Globalisation from Itself’, explains for Finance Monthly.
WTO figures already show a significant slowdown in the growth of international trade as a percentage of GDP. We are still only at the early stages, but a trade war and a stalling of globalized trade is almost inevitable.
This first part of the 21st century has seen many shifts from the post-war global world order that we had all become used to and on which the trans-national business model has been built. These changes are significant, encompassing political, cultural and economic shifts that have upended old assumptions.
To cite but a few examples, global governance structures (WTO, IMF, World Bank, etc) were previously seen as fair arbiters of the global order. Now their governance structures are seen by developing countries as dominated by the West and by the developed world as no longer serving their interests.
‘World trade produces net benefits for all’ was the 20th century mantra. Now it is clear that such benefits are very unevenly distributed with consequent economic, social and political implications. The free movement of global capital was seen as a vital fuel for growth and development. Now it is seen as potentially destabilizing, a system for hiding large amounts of illicit money, and a facilitator of tax arbitrage.
Low labour costs were seen as the competitive advantage of developing countries. Now they are seen as the basis of ‘unfair competition.’ Persistent trade imbalances were dismissed. Now we understand their corrosive effects on deficit countries.
In an information driven world, privacy and national security issues affect trade – from the manufacturing of routers to the security of data platforms, to building self-driving cars. For instance, Qi Lu of the Chinese tech company Baidu explains: “The days of building a vehicle in one place and it runs everywhere are over. Because a vehicle that can move by itself by definition it is a weapon.
But maybe most important is the major geopolitical shift. The post-war world order was characterized by Western dominance and overseen by the hegemonic power of the US. Now we have three more or less equally potent trading blocs – the US, China and its sphere of influence, and the European Union. Economists have known for decades that in such a structure, competition between blocs was much more likely than co-operation.
Trans-national business has played a role in these changes. A meaningful proportion of the US trade deficit comes not from ‘Chinese goods’ but from American goods that are being manufactured in China (the computer I am writing this on, for example). Businesses have long engaged in arbitrage between countries in investment, jobs and taxes, nurturing, over time, what has turned out to be a political time-bomb.
Neither can business leaders be blamed for such behaviour. They were doing their job: optimizing their business models. But times have changed. The rules of world trade need overhaul. And business models will have to change with them.
Some business leaders are already taking action. “The days of outsourcing are declining. Chasing the lowest labor costs is yesterday’s model” says Jeff Immelt of GE. “Now we have a strategy of localization and regionalization” states Inge Thulin of 3M.
It is also worth bearing in mind that the trade agreements that we have all become used to were developed in a world of trading largely in goods. They are poorly suited to trade in services, digital commerce and large financial flows.
It is tempting to dismiss talk of trade wars as a Trump phenomenon. Much bombast, little meaningful action, and something that will soon pass. That would be to misunderstand the slow but sure tectonic shifts – political, cultural and economic – that are happening.
How individual businesses react, or, preferably, pre-empt these shifts will determine their future performance. And they will determine whether the political consequences of their actions will, over time, smooth things out or make them worse.
