Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Trade Secrets newsletter. Sign up here to get the newsletter sent straight to your inbox every MondayNow there’s a geopolitical trade policy for you. Never mind Brussels earnestly setting AI regulations and hoping they osmose abroad through the Brussels Effect. The US and assorted allies, especially the UK, trying to smash trade routes open in the Red Sea by bombing the Houthi militants really does have some echoes of the gunboat diplomacy of earlier centuries. Later this week I’ll write about the security that underpins globalisation, which is about more than just patrolling shipping lanes. But today I’ll focus on the immediate effects on trade from the continued disruption, and how long till it gets really serious. It’s certainly going to add a bit of spice to the World Trade Organization meeting in Abu Dhabi next month. Charted waters is on expectations of falling global interest rates.Get in touch. Email me at [email protected] the HouthisI don’t claim you exactly needed to be a strategic genius to spot this, but I said just before Christmas it was pretty obvious that there would be serious pushback to militants clogging up one of the world’s great trade arteries.Together with the world’s other great shipping canal, Panama, being severely affected by drought, the supply shock to freight might finally have arrived. I say might because it seems unlikely the Houthi rebels will be able permanently to shut the Suez Canal to shipping without there being some fairly serious reaction.Last week’s strikes from the US, UK, Australia, Bahrain, Canada and the Netherlands were pretty impressive. It’s also notable that, although the Houthis have tied their attacks to Israel’s bombing of Gaza, governments joining in don’t necessarily back the US stance on Israel.So far, though, they haven’t deterred the Houthis or indeed made any noticeable impact on the rising prices of freight or insurance. As the FT reported over the weekend, reinsurers have been putting get-out clauses into contracts protecting them against having to pay out for damage during a full-scale Middle East conflict. Freight rates for routes through the canal are currently four or five times higher, and journeys are taking 20-25 per cent longer by going round the southern tip of Africa, than before the Houthis started attacking ships. Because the global container system is so interconnected, prices are spiking elsewhere, such as the US west coast routes.I’ll stick to my prediction that this isn’t a major crisis for globalisation, but it’s obviously a big deal. So what happens now? As is now traditional at Trade Secrets during times of supply chain turmoil, I went to the mountaintop to consult Ryan Petersen, chief executive of the freight forwarder and logistics company Flexport, who was one of the most incisive analysts of the snarl-ups in container traffic back in 2021-22. Here are the main points from that and other conversations:Things are likely to get worse this year but then get better even if traffic through the Suez Canal remains blocked. Carriers ordered a lot of new vessels in recent years. Peterson says that between 2022 and 2025, the total capacity of container shipping is reckoned to go up by about 25 per cent. “There’s so much shipping capacity coming on stream that in the long run the increase in rates evens out. But you could see the rates remaining elevated for a couple of quarters, maybe a year.”Freight demand is price inelastic in the short run and transport isn’t a big part of overall costs. Petersen says the average container holds about $100,000 worth of goods wholesale, which will be sold at destination for $300,000. So a price increase of $6,000 adds about 2 per cent — not negligible for inflation if it gets passed through to consumer prices, but not big enough for manufacturers of, say, high-value electronics to stop shipping product. It’s not clear whether most customers are in that much of a hurry. There’s obviously a trade-off whereby the Red Sea journey is faster but has a higher risk than going the long way round. Petersen says: “I haven’t seen evidence that customers are asking to go through the canal rather than round Africa.”Most will wait a few months before making big changes in production. Manufacturers in the Middle East, whose journey times to Europe have tripled by having to go round Africa, may already be pausing production. But Asian companies whose journey times have only increased by 20 per cent will wait at least a quarter or so to see how the situation develops before shifting location of factories or changing target markets.The Suez Canal is uniquely vulnerable and uniquely valuable. It carries something like 30 per cent of all global container traffic — more than the Panama Canal, which is having its issues with low water levels at the moment. And while there are security concerns in other parts of the world, such as piracy off Somalia and in the Malacca Strait, dealing with pirates is relatively straightforward (you sink their boats) compared with fighting a land-based force such as the Houthis. The value of traffic suggests there will be rising diplomatic or military pressure for a solution to the blockages. Petersen says: “The whole world is pretty much lined up wanting to have smooth sailing through this region.”Air and land freight can’t make up the difference. There has predictably been increased demand for air freight as a result of the Red Sea attacks, particularly from companies with high-value time-contingent goods. But as Petersen points out, a container ship holds 10,000 40-foot containers while a Boeing 747 holds seven. “If 1 per cent of ocean freight switched to air, it would more than fill all the capacity.”Charted watersExpected cuts in interest rates are good news for global growth and hence for trade. With underlying inflationary pressure coming down and inflation expectations well contained, the Red Sea disruptions might delay them but probably won’t put them into reverse. Just as the rise in inflation and interest rates over the past two years was largely a global phenomenon, so is the expected loosening of monetary policy now.Trade linksThe Chinese carmaker BYD is expanding its global presence, looking to acquire a lithium producer in Brazil to supply its car plant there after also agreeing to set up in Hungary. This is a great FT profile of the company’s head, Wang Chuanfu.On that note, the Economist boldly argues that Europe and the US should just relax and enjoy cheap Chinese EVs rather than trying to lock them out of their markets.That’s going to hurt: the Dutch semiconductor equipment manufacturer ASML, which is subject to a US-led sanctions regime on exports to China, says the EU is not in the Champions League of economic security and statecraft. The FT’s Swamp Notes newsletter looks at whether Joe Biden can outflank Donald Trump on trade.The brave start to the self-styled libertarian Javier Milei’s presidency in Argentina, with the peso devalued and price-fixing agreements abandoned, has led to inflation shooting above 200 per cent in December.Trade Secrets is edited by Jonathan MoulesRecommended newsletters for youEurope Express — Your essential guide to what matters in Europe today. 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In the last three months of the year the percentage of businesses that expected better economic conditions rose to 8% from 4% in the previous three months, the central bank said in its quarterly survey.Those expecting things to get worse decreased to 29% from 37% but uncertainty about the political and economic outlook and the future course of energy prices was still weighing on sentiment, the survey warned.Expectations improved thanks to both stronger domestic demand and better conditions for investment, it said.The euro zone’s third-largest economy expanded a meagre 0.1% in the third quarter from the previous three months after contracting by 0.4% between April and June. National statistics bureau ISTAT said on Nov. 10 that the fourth quarter would also be weak. It will issue a flash estimate of fourth quarter gross domestic product on Jan. 30.The Bank of Italy’s poll showed businesses expect inflation to stand at 2.3% in 12 months’ time, down from 4.7% in the previous survey.The survey’s 12-month projection was the lowest since the second half of 2021 and is not far from the European Central Bank’s target of 2% for the euro zone as a whole.The International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) both see Italian inflation averaging 2.6% this year.The Bank of Italy survey was conducted between Nov. 22 and Dec. 14 among Italian industry and services companies with at least 50 employees. More

Taiwanese voters on Saturday swept the ruling Democratic Progressive Party’s presidential candidate Lai Ching-te into power, rejecting Chinese pressure to spurn him. And on Monday, U.S. Republican presidential candidates face the party’s first nominating contest in Iowa.Here’s a look at key elections in focus for markets, in roughly chronological order. 1/ EUROPEDates: March 10 (Portugal), June 9 (Belgium), June 6-9 (European Parliament), autumn/winter (Croatia), November (Romania), to be confirmed (Austria)Back story: November’s shock win for Geert Wilders’ Freedom Party in the Netherlands galvanised the eurosceptic far right. Its namesake leads Austria’s polls. Portugal’s Chega party’s vote may double, though left parties lead there.Crucially, far-right parties eye gains in the European Union’s legislature, vowing to toughen migration policy and soften green reforms. Market risks: Italian stocks and bonds, Europe’s top 2023 performers, may suffer if gains for eurosceptic parties are seen as weakening the commitment to European integration.The EU raising joint debt to back the post-pandemic recovery has helped reduce the perceived riskiness of Italian debt. With the EU parliament heavily involved in legislation and electing the next head of the bloc’s executive, watch the readout on further support for Ukraine and climate policy. 2/ RUSSIA:Date: March 17Back story:Vladimir Putin, who was handed the presidency by Boris Yeltsin on the last day of 1999, is certain to win another six years in power. Polling shows Putin enjoys approval ratings of above 80% in Russia. Opposition politicians say the election is a carefully stage-managed imitation of democracy. Key market risk: In the campaign, Putin may reveal more of his thinking about the war in Ukraine. Putin has warned the West any attempts to meddle in the election will be considered an act of aggression.     Western governments such as the United States and Japan are considering seizing frozen Russian assets such as cash and government bonds held by its central bank overseas. Russia has said it will retaliate if that happens.     Russia’s economy has been boosted by massive increases in defence spending on the war, though stubborn inflation fanned by a sharp rouble depreciation has forced interest rates higher.3/ TURKEYDate: March 31 (local election)Back story: A return to orthodox economics following President Tayyip Erdogan’s May re-election has started to lure back international investors. JPMorgan reckons 2024 could be a record year for international bond issuance.Key market risk: A weak lira and inflation topping 60% is leading to worries on Erdogan pulling back on the orthodox pivot.Neither widely respected Finance Minister Mehmet Simsek or plucked-from-Wall-Street Central Bank Governor Hafize Gaye Erkan are expected to bend easily. Erdogan has a history of turning on a dime and has fired four central bank chiefs in as many years.4/ INDIADate: April-May, TBCBack Story: Narendra Modi is expected to win a third term as prime minister leading the Hindu nationalist Bharatiya Janata Party (BJP) in national elections. Investors moving cash out of China have turned to India.Key market risk: Persistent inflation could hurt the BJP. Modi would need to form a coalition if it does not win an outright majority.Key commodity exporter India has roiled markets by restricting rice, wheat and sugar exports. A shift back to fiscal populism risks pushing up India’s fiscal deficit which would need funding from potentially record high domestic market borrowing. 5/ MEXICODate: June 2Back story: Presidential election will involve a full Congress reshuffle and nine state elections. Polls give incumbent National Regeneration Movement (Morena) party and its candidate, ex-Mexico City mayor Claudia Sheinbaum, a wide double-digit lead. A more balanced Congress preventing constitutional changes from populist Morena is anticipated. But given the success of current President Andres Manuel Lopez Obrador’s spending drives, Sheinbaum is expected to follow suit.Key market risk: Heftier spending could pull down Mexico’s peso and hurt government bonds. 6/ SOUTH AFRICA Date: May-August 2024 (TBC)Back story: The ruling African National Congress risks losing its parliamentary majority in elections for the first time since Nelson Mandela led it to power in 1994.Economic turmoil, power cuts, austerity and graft allegations have alienated voters. The ANC may need to partner with the Democratic Alliance or the Marxist Economic Freedom.Key market risk: Pre-election, the government could ease austerity, pushing up debt. If the ANC allies with a leftist party, social spending could rise. Worries about a weak currency and public finances could slow down rate cuts. 7/ UNITED STATESDate: Nov 5Back story:Donald Trump is predicted to win the Republican nomination in upcoming primaries, setting the stage for a tight battle with Democrat incumbent Joe Biden – a rerun of the 2020 election that ended with a pro-Trump mob storming Congress in an attempt to block certification of Biden’s victory.Trump faces criminal trials in four jurisdictions and an array of other legal cases, while he still claims falsely that the 2020 election was stolen. Biden calls his opponent a threat to democracy who would seek vengeance on his many foes if he regains power. Market risks:Markets shrugged off the violence that followed the election four years ago. But given the heated rhetoric on both sides this time around, a Trump-Biden rematch could still worry investors over the risk of social unrest.A bitter election could affect consumer sentiment as the world’s biggest economy seeks to avert a recession from the lagged effects of aggressive interest rate rises.The dollar could swing on election probabilities. Stocks could be hurt by caution over U.S.-China tensions if the parties harness the popularity of trade barriers, with analysts saying higher tariffs would fuel inflation, force up the dollar and hurt the yuan, euro and Mexican peso.Spending cut pledges by either party could upend a complex but popular U.S. bonds trade that wagers government borrowing will increase. And watch oil: Trump favours more U.S. drilling, which Biden has reined in.8/ BRITAIN Date: due by Jan 2025, expected by end-2024 Back Story: The opposition Labour party under centre-left candidate Keir Starmer leads the ruling Conservatives in the polls. Market risks:Pre-election, a stagnant economy and tight fiscal budget mean government bonds could be unsettled by any surprise spending promises. A March 6 budget might well contain new tax cuts.Labour plans to loosen planning rules, in a risk for house-builders and make targeted changes to tax rules which could hurt energy companies. It also wants closer relations with the European Union following Brexit, which could boost sterling. 9/ VENEZUELA Date: 2024 TBCBack Story: Incumbent Nicolás Maduro has an advantage in presidential elections, with main opposition candidate, María Corina Machado, banned from participating due to alleged crimes such as supporting U.S. sanctions on Maduro’s government and backing former opposition leader Juan Guaido. Market risks:In October, the U.S. lifted oil sanctions for six months and debt sanctions indefinitely, allowing U.S. investors to trade in some bonds in exchange for talks to ensure fair and free elections.    Re-instated sanctions could shake Venezuelan stocks and bonds. Pricing deeply distressed, bonds more than doubled after sanctions were lifted. A possible debt restructuring is also in focus. More

Volvo expected consultations to become finalised during the first quarter of this year. In 2022, Arquus, with about 1,200 employees in France, represented around 1% of Volvo Group revenues, it said in a statement.”This prospective acquisition contributes to strengthening cooperation between France and Belgium in a strategic sector,” said Belgium’s John Cockerill in a statement. ($1 = 10.2926 Swedish crowns) More

LONDON (Reuters) – Global hedge funds kicked off the largest net selling of U.S. financial stocks in 16 weeks just as earning season started in the week ending Jan. 11, a Goldman Sachs note to clients said. Hedge funds exited long positions and added short bets that stock prices would fall in banks, insurance companies and financial intermediaries before bank earnings were released on Friday, said the Goldman note dated Jan. 12 and seen by Reuters on Monday. The note, written by Goldman’s prime brokerage which serves hedge funds, tracked trading activity from Friday Jan. 5 to Thursday Jan. 11. U.S. banks’ shares fell on Friday after major lenders reported lower profits in a choppy fourth quarter clouded by special charges and job cuts, with signs an income boost from high interest rates is waning and some consumer loans are starting to sour.The S&P 500 banks index closed over 1% down after earlier hitting its lowest level since Dec. 14.JPMorgan Chase (NYSE:JPM) and Bank of America posted a drop in fourth-quarter profit, while Wells Fargo posted higher fourth-quarter profit but warned that its net interest income could fall 7% to 9% this year, sending its shares down more than 3% on Friday.Financials, consumer companies that make products that people buy but don’t necessarily need and healthcare stocks were sold, the Goldman note said. Shorting activity focused on the finance sector was particularly elevated, said the bank. This was also true for real estate and the travel and leisure industries, it added. U.S. markets are closed on Monday for the Martin Luther King holiday. More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Poland’s Prime Minister Donald Tusk is maintaining the protectionist stance of the previous government and is set to oppose the renewal of an EU free-trade deal with Ukraine. The European Commission on Tuesday is expected to propose extending until June 2025 the suspension of tariffs and import quotas on Ukrainian products in a bid to help keep the country’s economy afloat while it continues to fight against Russia’s invasion. Poland’s stance will not affect the outcome, as the decision is taken by majority voting.But Tusk sticking to a policy introduced by the nationalist, Eurosceptic government led by the Law and Justice (PiS) party stands in contrast to his pledge when he took office last month to put Poland back at the heart of EU policymaking after years of feuding with Brussels. It highlights the difficulty for the Polish premier to strike a balance between his pro-European agenda and the interests of farmers and hauliers who want to maintain import bans and have been blockading the country’s border crossings with Ukraine since November in order to force the government to back their demands. PiS has also launched a significant backlash, supported by the country’s president, to any attempts by Tusk to undo reforms and appointments made by the previous government. Tusk is preparing to visit Kyiv in the coming days to try to ease tensions provoked by the border blockade and to reach a compromise on the import ban the PiS government imposed last spring on Ukrainian grain. He has called on Ukraine to help defuse tensions with Polish farmers and truck drivers rather than demand that Poland lifts its import ban. Poland’s deputy agriculture minister Michał Kołodziejczak warned at the weekend that “there is no consent” from his government to the EU renewing preferential trade conditions for Ukraine because that is “a threat” for Polish farmers. “The interest of Polish farmers, our food security and profitable production are a priority,” Kołodziejczak said on the social platform X. The commission is considering a tougher safeguard clause that would allow exports to be stopped quickly if they swamped the market in some member states.Officials say Tusk is seeking a similar deal to the one struck with Romania and Bulgaria. They lifted a blockade last year in return for Ukraine agreeing an export licensing system which limited the flow into their countries.“The bulk of the work is in the dialogue between the two capitals [Warsaw and Kyiv],” said an EU diplomat. Since taking office, Tusk has also shied away from ordering Polish police and border guards to break up the blockade. Echoing farmers, Polish truckers are complaining about cheaper and unregulated competition from Ukraine under a temporary free transport agreement with Brussels agreed four months after Russia’s all-out attack on Kyiv in February 2022. According to Polish government data, about 90 per cent of trucks delivering to Poland from Ukraine are Ukrainian, up from 60 per cent before the liberalisation. Tusk said on Friday that Poland would continue to give Ukraine full support in its war against Russia, but he also pledged to defend key Polish economic sectors against unfair competition. He called on Kyiv to help stop “the game of dirty interests” in cross-border trade, repeating a claim made by PiS that the EU’s help to Ukraine’s agriculture was a boost for oligarchs who control the sector rather than small farmers. “I’ll expect the Ukrainian side to help us cure these pathologies so that our farmers and hauliers do not have to block the borders,” he said during an interview with Poland’s three main broadcasters.   More