Scott Ingham, Investment Director at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK
Much of the past two years has been dominated by the US-China trade war, which began with solar panels and washing machines in early 2018 before escalating to include tariffs on hundreds of billions of dollars’ worth of US and Chinese exports. Each major escalation in the dispute has incited a panicked response from investment markets, while economic data across the US, China and the global economy has demonstrated signs of strain. This is particularly concerning in a global economy already struggling to find growth.
Changes in trading arrangements can quickly lead to ripple effects throughout both domestic economies and the wider world. Through shifts in pricing (resulting from changing supply and demand dynamics) the impact can extend to everyone in the economy.
Tea, opium and electronics: trade wars through history
In theory, trade is designed as an act of mutual benefit. However, history is littered with examples of it being used as a weapon, often playing a part in national and global political history. The infamous ‘Boston Tea Party’ in 1773 was, on the surface, the destruction of a tea shipment in response to an unfair tariff scheme imposed by the ruling British. But this act of defiance is also widely seen as one of the sparks that lit the flame of the American Revolution, ultimately leading to US independence from the UK.
Less than 100 years later, the ‘Opium Wars’ between China’s Qing dynasty and the British Empire foreshadowed some of President Trump’s frustrations about Chinese trade imbalances today. In the early decades of the 1800s, the UK had come to realise that Europe was buying far more from China than China was importing from Europe in return. While 21st century America faces a slew of Chinese electronics and other manufactured goods, 19th century Europe was hungry for Chinese silk, tea and porcelain. And if Trump’s decision to tax billions of dollars’ worth of Chinese exports seems dramatic, consider that for the British Empire in the 1800s, redressing the balance meant pouring opium into China, against the Qing dynasty’s express wishes.
The result of the Opium Wars was the takeover of key territories (including Hong Kong) by the UK, and China being forced to accept tariff-free trading. The wars also permanently disrupted rural communities across South Asia (where opium was farmed), arguably even fuelling the growth of the colossal opiate industry in evidence today.
Trade wars have often been responsible for making bad economic situations worse. During the Great Depression in the 1930s, US President Hoover signed the Smoot-Hawley Tariff Act, which raised import duties on foreign goods. In another prequel to Trump’s own stance, one of Hoover’s primary goals was to protect US businesses. However, retaliatory tariffs from abroad led to a drop in US exports, likely worsening and prolonging the Great Depression.
Can trade wars be justified?
In March 2018, President Trump announced that “trade wars are good, and easy to win.” The evidence suggests that, in reality, they are neither. And while trade restrictions are inevitable and can be justifiable, the arguments in favour of outright trade war are decidedly mixed.
Gains from trade agreements are not usually shared equally by everyone, and as a result can be said to fuel inequality. Even so, trade is widely accepted as a positive for economic growth, and for raising average incomes.
It could be argued that trade wars act as a proxy for physical confrontation, and therefore help to avoid open warfare. However, this has not always been the case (e.g. the Opium Wars included armed conflict).
An argument could be made that, in reducing global trade, trade wars might lower the carbon emissions associated with mass manufacturing and transportation. However, trade wars often reflect diplomatic hostility – bad news for the international cooperation so sorely needed on sustainability initiatives.
At least part of Trump’s initial dispute with China focused on protecting US intellectual property (IP), especially in the technology sector. However, Trump’s rhetoric quickly moved on to other topics and his IP protection goals took a relative backseat, not featuring in October 2019’s ‘Phase 1’ agreement. It is also worth noting that protectionism can unduly prolong the lifespan of inefficient or underperforming companies, as it belies any ‘survival of fittest’ principles.
Where does trade go from here?
As we enter 2020, a significant portion of global trade policy continues to hang on the whims of one man. And as the US turns its trade spotlight onto Europe too, it demonstrates a willingness to fight trade battles on multiple fronts simultaneously. Investors would do well to brace themselves for further protectionist policies and tariff disputes ahead.
Even so, the global trade journey could take many routes from here, and markets have demonstrated their propensity to respond positively to signs of cooperation and optimism. With this in mind, we should still remain mindful of the positive outcomes (such as an increase in imports and exports, leading to better growth potential) that trade deals can create.
Stocks edge down as investors hit pause, watch bond yields
By Suzanne Barlyn
NEW YORK (Reuters) – Global equity markets were little changed on Tuesday as Wall Street retreated and investors paused to gauge whether a bond yield jump had run its course, taking stock of gains from Monday’s surge.
The subdued performance of the three major Wall Street indices followed a flat close in Europe and slipping shares in Asia.
“It was such a strong opening to the month yesterday that investors could be short-term focused and saying, ‘Let’s take some of the profits that we saw yesterday,'” said Sam Stovall, chief investment strategist at CFRA Research in New York.
March began with a bang on Monday as global equities markets rose, the S&P 500 had its best day since June 5 and bond markets calmed after a month-long selloff.
In Tuesday late-afternoon trading, the Dow Jones Industrial Average rose 45.37 points, or 0.14%, to 31,580.88, the S&P 500 lost 3.1 points, or 0.08%, to 3,898.72 and the Nasdaq Composite dropped 106.23 points, or 0.78%, to 13,482.60.
The pan-European STOXX 600 index rose 0.19% while MSCI’s gauge of stocks across the globe %.
Emerging market stocks rose 0.05%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.16% lower, while Japan’s Nikkei lost 0.86%.
The European Central Bank should expand bond purchases or even increase the quota earmarked for them if needed to keep yields down, ECB board member Fabio Panetta said on Tuesday, after weeks of steady increases in borrowing costs.
Australia’s central bank on Tuesday affirmed its pledge to keep interest rates at historic lows as policymakers battle to stop surging bond yields from disrupting the country’s surprisingly strong economic recovery.
After a sharp selloff last week, U.S. Treasuries have stabilized with bond market indicators and derivatives positioning pointing to near-term calm. But an improving economy could trigger another slide in their prices.
U.S. Federal Reserve Governor Lael Brainard said she was closely watching bond markets and would be concerned if a recent rise in yields continued and began to constrain economic activity.
“Some of those moves last week and the speed of the moves caught my eye,” Brainard said on Tuesday.
A Treasuries selloff last week pushed the 10-year yield to a one-year high of 1.614%. Benchmark 10-year notes last rose 11/32 in price to yield 1.4102%, from 1.446% late on Monday.
Gold prices rose, inching up from a more than eight-month low, as a retreat in the dollar and U.S. Treasury yields lifted demand for the safe-haven metal.
Spot gold added 0.8% to $1,736.02 an ounce. U.S. gold futures settled up 0.6% at $1,733.60.
The dollar index fell 0.318%, with the euro up 0.37% to $1.2092.
Earlier, the dollar was up for a fourth consecutive day after the spike in bond yields challenged the market consensus for dollar weakness in 2021. But riskier currencies rose as bond markets calmed and stocks recovered.
Bitcoin fell 2.19% to $47,808.00 after rising nearly 7% on Monday.
Shares in mainland China and Hong Kong fell overnight after a top regulatory official expressed concerns about the risk of bubbles bursting in foreign markets.
Oil prices largely shrugged off expectations that OPEC would agree to raise oil supplies at a meeting this week.
The global oil market is rebalancing after damage to demand wrought by the COVID-19 pandemic was met with curbs on output by OPEC producers, the group’s president said.
The industry is recovering from a collapse in demand triggered by the pandemic, but U.S. shale production will not recover to pre-pandemic levels, Occidental Petroleum Chief Executive Vicki Hollub said on Tuesday.
“The recovery is looking really good to us. If you look at what’s happening in India as well as the U.S., I think the oil industry is looking like things will be pretty good for us over next couple of years,” Hollub said.
U.S. crude futures settled down 89 cents at $59.75 a barrel, while Brent futures fell 99 cents to settle at $62.70 a barrel.
(Reporting by Suzanne Barlyn; Editing by Dan Grebler)
Robinhood now a go-to for young investors and short sellers
By John McCrank
NEW YORK (Reuters) – Robinhood, the online brokerage used by many retail traders to pile in to heavily shorted stocks like GameStop Corp, has made an ambitious push into loaning out its clients’ shares to short sellers as it expands its business.
The broker had $1.9 billion in shares loaned out as of Dec. 31, nearly three times the $674 million a year earlier, and it was permitted to lend out $4.6 billion worth of securities under margin agreements, around five times bigger than the prior year, according to an annual regulatory filing late on Monday.
The size of the jump highlights Robinhood’s rapid growth over the past year as the number of retail investors has soared in the work-from-home environment during the pandemic and as retail brokers have largely eliminated trading fees, a model Robinhood helped pioneer.
Menlo Park, California-based Robinhood is expected to go public this year with a valuation of more than $20 billion.
Securities lending is common among brokerages, which can earn income by lending shares to hedge funds and others, who then sell the shares back into the market, betting the share prices will drop so they can buy them back at a lower price when it is time to return them, pocketing the difference.
Shares that are in heavy demand from short sellers, like GameStop, which had 140% short interest in January https://www.reuters.com/article/us-retail-trading-shortselling-explainer/explainer-how-were-more-than-100-of-gamestops-shares-shorted-idUSKBN2AI2DD, command the biggest premium from the lender.
What makes Robinhood notable is that many of the stocks its users invest in are among the most sought-after by people who want to bet against them, said one senior financial executive involved with hedge funds.
It was unclear how great a benefit the securities lending was to Robinhood’s revenue and income, which it does not disclose.
Robinhood declined comment on the filing and did not immediately respond to a request for comment on the details of which stocks it loans out.
In January, retail investors coordinated through trading forums on social media in an attempt to punish hedge funds by buying up shares of GameStop and other heavily shorted names, like AMC Entertainment, driving up their prices and forcing short sellers to close out positions at big losses.
On Jan. 28, at the height of the retail trading mania, Robinhood, along with several other brokers, restricted the buying of GameStop and other so-called meme stocks due to a massive spike in collateral requirements needed to clear the trades, angering many of its customers.
The trading restrictions sparked congressional hearings, regulatory probes and have placed greater scrutiny on short selling.
In response, Vlad Tenev, Robinhood’s chief executive officer, called for shorter stock settlement times, which would reduce clearing collateral requirements.
He also said the idea that more shares of a stock can be shorted than there are available to trade, as was the case with GameStop, is a “pathology” that could destabilize the financial markets.
Robinhood positioned itself for growth in securities lending in October 2018 by launching its own clearing broker, which acts as a go-between with the clearinghouse that settles its trades, and allows it to hold its customers’ assets. The broker can then lend out securities its customers buy on margin.
At present, less than 3% of Robinhood’s funded accounts are margin-enabled, Tenev recently told Congress.
(Reporting by John McCrank in New York; Editing by Megan Davies and Matthew Lewis)
Resurgent stock market evokes memories of long-gone bubble on Tokyo’s ‘Wall Street’
By Junko Fujita
TOKYO (Reuters) – At the almost empty “Wall Street” bar and restaurant in Tokyo’s Kayabacho financial district, three groups of patrons dine quietly at tables separated by partitions.
The sedate scene is a far cry from the area’s heyday 30 years ago when traders flush from big wins on the nearby Tokyo Stock Exchange routinely crowded the restaurant’s bar, downing glasses of premium whiskey.
Even though Japanese stocks are scaling giddy heights not seen since the asset inflation bubble of the late 1980s and early 1990s, bars and restaurants in the financial district aren’t along for the ride.
Kayabacho’s streets are instead eerily quiet.
“During the bubble era, people came here to drink a glass of Ballantine’s 30-year-old (whisky) for 5,500 yen ($52), even when there’s no seats available, just standing by the cash register,” “Wall Street” owner Kenichi Inoue, 62, told Reuters.
Inoue opened the European style bar and restaurant in 1989, the year the Nikkei index hit a record peak, aiming to serve drinks and food at the affordable price of around $30 per person.
Brokers and traders packed into the bar almost every evening, with tables at the back usually filled by workers from Yamaichi Securities, then the country’s fourth largest brokerage.
“It was easy to guess the size of the crowd for the evening,” said Inoue. “If the market was up, I knew it would be busy.”
Inoue’s restaurant wasn’t the only establishment to benefit during the boom. Coffee shops scattered throughout Kayabacho were filled with brokers exchanging information on the market.
The ‘Tatsumi’ restaurant was popular with superstitious traders because it served tempura, or deep fried vegetables and fish. The Japanese word for “deep-fry”, ageru, has the same sound as the word “boost”.
“Back then brokers used to come here in a group. They gave us 100,000 yen in cash in an advance,” said 62-year-old owner, Masahiko Tsuda, citing a figure equivalent to around $800 at the time. “If that was not enough, they paid the difference at the end of the week.”
The party came to an end when the stocks bubble burst in the early 1990s. Yamaichi was one of four major banks and brokerages that collapsed in 1997.
Compounding the market slide, the Tokyo Stock Exchange in 1999 completed a decade-long switch to electronic trading, closing the formerly bustling trading floor.
The number of brokerage employees almost halved from a peak of 170,000 nationwide in 1991 to 91,000 last year, according to the Japan Securities Dealers Association.
With them went much of the vibrancy of Kayabacho, a downturn that has been exacerbated by the coronavirus pandemic, which has led to trading restrictions on bars and restaurants across Tokyo.
Redevelopment plans for Kayabacho, which houses many small and old buildings, have been in train for several years, with attempts to rebrand the area as a fintech hub. Heiwa Real Estate, the owner of the stock exchange building, plans to open a 15-storey office tower in the area later this year.
But the revamp lags the refurbishment of neighbouring districts like Marunouchi and Nihonbashi, where major property developers Mitsubishi Estate and Mitsui Fudosan have created hubs for global firms.
Adding to Kayabacho’s woes, the coronavirus pandemic has dealt a blow to the real estate market across Tokyo, as more people work from home and domestic economic growth slows.
“Kayabacho’s atmosphere is dark and gloomy,” said Yoko Hattori, 52, the owner of a standing bar, New Kayaba. “The economy is bad. Many buildings here are old but renovation is not easy because it costs money.”
Tsuda said he no longer sees people flashing lots of cash at his restaurant, while Inoue said “Wall Street” was facing the most critical time of its history.
Inoue has attempted to diversify his menu from the pasta, pizza and grilled meats that catered to mostly male stockbrokers, adding organic food and cold press juice for more health-conscious customers.
He is grateful that his own business never relied too heavily on the excesses of the bubble era: “If this had been an high-end restaurant, it would have been closed a long time ago.”
(Additional reporting by Mayu Sakoda and Hiroko Hamada; editing by Jane Wardell)
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