Aurelia Butler

This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. Yesterday was a wild ride in the stock and bond markets, with shares forming a reverse N shape (down, up, down again) through the day and Treasury yields forming a reverse hockey stick (flat, then sharply up). Remember your Mandelbrot: over any given timeframe, markets have momentum and follow a trend, but in the transition periods between trends, they bounce around quite randomly. This feels like one of those indeterminate transition periods. So when does the bouncing end, and the next trend take hold? Email us: [email protected] and [email protected] is a growth scare first and a tariff scare secondMarkets are volatile and uneasy, and it is easy to attribute this to the US tariffs just imposed on Canada, Mexico, and China. But what we are seeing in markets is more consistent with a general growth scare than a tariff-specific sell-off. And this makes sense: the tariffs were an unpleasant surprise that followed and added to, rather than caused, a bundle of bad signals from the economy and markets.That was certainly true of Monday’s equity sell-off which, as we detailed yesterday, looked like a classic risk-off day, with defensives rising and cyclicals falling. And it was certainly true during Tuesday’s rollercoaster. The biggest losers on the day were US banks, with the BKW bank index falling 4.5 per cent. Why banks? Because most US banks’ lending businesses are leveraged to domestic growth, and their margins will be diminished by the lower interest rates that slower growth will bring in its train. And the market does see rates coming down: the futures market has added almost two full rate cuts to its expectations for 2025 in the past month.More evidence that growth rather that tariffs is primarily in play: the dollar has been falling for more than a month, and fell sharply yesterday.If there is one reliable consensus about tariffs among their fans and foes, it is that they are dollar-positive (tariffs reduce demand for imports and therefore the foreign currencies needed to buy those goods). So what is driving the greenback down now? Again, lower growth expectations; they drive down interest rates (in particular real rates), lowering the differential with rates in Europe and elsewhere. The currencies adjust accordingly. Signs of expansionary fiscal policy in Germany reinforce this effect; the fact that a few weeks ago every trader and his dog were long the dollar does, too. One might wonder, in addition, whether financial flows are weakening the dollar as well, as US risk assets no longer look like a one-way bet. The fund flows data over the next few weeks will be interesting in this respect.The growth and tariff effects are not mutually exclusive. Tariffs, in the short term, are growth negative. But right now there is much more going on than that.Investor sentiment, the wall of worry, and valuationsThe standard measure of retail investor sentiment, the AAII Survey, has undergone a remarkable crash over the past month. The latest reading of its bull-bear spread (the percentage of respondents feeling bullish about markets over the next six months, minus the percentage feeling bearish), from the last week in February, hit -41, a low only equalled twice in the past 20 years. See the light blue line here:Some content could not load. Check your internet connection or browser settings.On the standard reading, this is a bullish sign — “be greedy when others are scared” as they say, or “stocks climb a wall of worry”. Indeed, for a long-term investor, the previous deep lows in the survey, in 2009 and 2022, were excellent times to buy stocks.That might be the case this time, too. But there is something to keep in mind. Stocks are currently only 10 per cent off their all-time highs last month. But at the previous lows in sentiment, equity prices had already fallen much harder. Stocks, in other words, look like they might have a ways to go before catching up (down?) with sentiment, should sentiment stay so depressed.Another way to make the same point is with valuations. At the previous lows in the bull-bear spread, price/earnings valuations had hit lows (see the dark blue line above). And while valuations have dropped recently, they are still very high by historical standards.Doge, growth and the labour marketIt is hard to analyse the economic impact of the Department of Government Efficiency (Doge), Elon Musk’s effort to shrink the federal government. Like all things with him and Trump, it’s messy. Its accomplishments have been overstated, and nearly all of its actions are under legal review and could be reversed.Doge could, in theory, severely slash government spending, with a negative flow through to GDP. But there are many who would argue that less government spending would be offset by a surge in investment and a private sector unburdened by oversight. At the same time, Congress would probably oppose any significant cuts to spending.The larger and more pressing risks are to the labour market. The government employs 3mn civilian workers, and even more government contractors (estimates vary, but a decent rule of thumb is 2:1, according to Torsten Slok at Apollo). The federal government started to grow at a faster rate in 2023:Over the past 18 months, the government has added roughly 3,000 federal employees each month — a big step up by its own standards, but a small change compared to the average of 186,000 jobs added per month last year. According to Skanda Amarnath at Employ America, the federal government has never been a major driver of employment growth, but it has been a drag:During past examples [of government downsizing], like the budget sequestration in the early 2010s, the federal government was a drag on hiring, about -4,000 to -10,000 a month. We might see a net reduction of something like 13,000 off of payroll growth, in the worst-case scenario.Last month, the US economy added 143,000 jobs — far below what many predict is our current break-even. A steady-to-fast reduction in government employees at a similar scale to the early 2010s would weaken an already softening labour market. And Doge-led reductions in federal employees is likely to go hand-in-hand with cuts in other sectors that receive federal money: state and local governments, non-profits and higher education, and professional services (where contractors generally sit).A flood of government lay-offs would not necessarily trigger a recession, however. In general, an uptick in the three-month moving average of national unemployment of 0.5 per cent precedes a recession, or so says the Sahm rule, an indicator widely used by policymakers. Doge would have to increase the unemployed population by more than 1mn to trigger the rule, according toClaudia Sahm at New Century Advisors, who came up with it. Most of the estimates Unhedged has seen suggest that Doge could lay off a maximum of 800,000 to 1mn federal employees and contractors. But even if there is not a recession, Doge’s job cuts could cause pain in communities where the government is one of, if not the, main employer: areas around army bases and the DC-suburbs, for example. And a weakening job market could put the Federal Reserve in a tough spot. Inflation is not dead, and the economy is weakening. If today’s new tariffs and whatever retaliation they invite causes prices to go up, the Fed needs to feel good about the job market to keep rates where they are or raise them further. If Doge makes the employment picture look significantly worse, the central bank could be caught between its two mandates, and the market might realise its worst fear: stagflation.(Reiter)One Good ReadRoyal shade.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More

Show video infoDonald Trump has warned that tariffs on the US’s biggest trading partners will cause “a little disturbance”, as he vowed to push ahead with his sharply divisive domestic agenda in a combative speech to Congress.In the first major policy speech of his second term, the president doubled down on his decision to impose 25 per cent tariffs on Canada and Mexico, and an additional 10 per cent levy on China.“Tariffs are about making America rich again, and making America great again,” he said. “It’s happening, and it will happen rather quickly.” Trump’s address comes amid mounting evidence that businesses and consumers are concerned about the effect of tariffs, which are likely to disrupt supply chains and send the costs of some goods higher.Wall Street stocks have wiped out all of their post-election gains as hopes that Trump’s policies would drive stronger growth have turned to worries about the trajectory for the world’s biggest economy. “There will be a little disturbance, but we’re OK with that,” Trump said. Trump also insisted that so-called reciprocal tariffs on goods from a wide range of countries would be imposed on April 2.The more than 90-minute speech, delivered to a palpably divided chamber in which several Democrats held signs of protest, caps a dramatic six weeks in which Trump has unleashed an aggressive agenda to reshape US trade and foreign policy and impose sweeping changes across the government.To raucous applause from Republicans, Trump declared: “America’s momentum is back. Our spirit is back. Our pride is back, our confidence is back. And the American dream is surging, bigger and better than ever before.”Trump used the speech to underscore his muscular approach to foreign policy, insisting he would “get” Greenland, the Arctic island that is part of Denmark and which he has repeatedly said he wants to take over, “one way or another”.New Mexico’s Democratic representative Melanie Stansbury holds a sign reading ‘This is not normal’ as Trump arrives to address Congress More

Stay informed with free updatesSimply sign up to the More

$75 per monthComplete digital access to quality FT journalism with expert analysis from industry leaders. Pay a year upfront and save 20%.What’s included Global news & analysisExpert opinionFT App on Android & iOSFT Edit appFirstFT: the day’s biggest stories20+ curated newslettersFollow topics & set alerts with myFTFT Videos & Podcasts20 monthly gift articles to shareLex: FT’s flagship investment column15+ Premium newsletters by leading expertsFT Digital Edition: our digitised print edition More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldBlackRock has agreed to buy two major ports on the Panama Canal from their Hong Kong-based owner as part of a $22.8bn deal, following pressure from Donald Trump over alleged Chinese influence at the vital waterway.Under the agreement, the ports’ Hong Kong-based owner CK Hutchison would sell the business to a consortium including BlackRock, Global Infrastructure Partners and Terminal Investment Limited, according to a company statement on Tuesday. The group would acquire a 90 per cent stake in the company that owns and operates the two ports in Panama.Trump has frequently alleged that “China is running the Panama Canal”, and rattled Panama when he threatened earlier this year to “take it back” under American control. The Trump administration has also demanded Panama reduce Chinese influence at the canal, claiming Beijing’s involvement in the ports had violated a treaty concerning its neutrality.The deal announced on Tuesday also includes an 80 per cent stake of CK Hutchison’s ports subsidiaries, which run 43 ports in 23 countries, including in the UK and Germany. It also runs ports in south-east Asia, the Middle East, Mexico and Australia.The remaining 20 per cent stake is held by port operator PSA, which is owned by Temasek, the Singapore sovereign wealth fund. CK Hutchison said it expected to receive cash in excess of $19bn from the deal, a figure that includes repayment of some shareholder loans. CK Hutchison’s market capitalisation is HK$148bn ($19bn). The group’s share price surged 22 per cent in morning trading in Hong Kong on Wednesday.Trump’s election victory in November and his calls for the US to retake control of the canal prompted CK Hutchison to consider the sale, sparking a short and intense period of negotiations for the ports, according to people briefed on the discussions.“When President Trump won and he started making noise about annexing Canada and Greenland and Panama, the pressure was put on the Panamanians,” one person familiar with the deal said. The person added that CK Hutchison “realised that it was a political headache and they wanted to do something”.To navigate the potential political fallout, BlackRock chief executive Larry Fink briefed senior leaders in the Trump administration, including the president, to secure their backing for the takeover, two people briefed on the matter said. One of the people added that the consortium would not have gone forward with its bid if they believed the US government would not support the deal.Controlled by Hong Kong’s richest man Li Ka-shing and his family, CK Hutchison has a portfolio of ports, retail, telecoms and other infrastructure. Ports operations made up about 9 per cent of CK Hutchison’s total revenue of HK$461.6bn in 2023.The canal has become a flashpoint in Trump’s first weeks back in office, as he looks to expand the US’s borders and take control of infrastructure assets — disrupting allies and countries that had profited from decades of growing free trade.The deal with BlackRock comes after the asset manager’s acquisition of GIP, which helped make it a force in infrastructure investing. The strategically important waterway is run by the Panama Canal Authority, an arm of Panama’s government. It was built by American engineers and run by the US from its opening in 1914 until a treaty in 1977 agreed a staged handover to Panama, which was completed in 1999.Hutchison Ports, one of the world’s biggest operators of container terminals, has managed the ports at either end of the canal since 1997 under concessions from Panama’s government. The facilities have often attracted political comment from US politicians who have alleged that CK Hutchison’s role means China in effect controls the canal. The facilities mainly operate as “trans-shipment” ports where containers are moved between ships transiting the canal and smaller “feeder” ships shuttling to destinations around the Caribbean and the Pacific coast of South and Central America.CK Hutchison arranged a new concession in 2021 to keep operating the ports for another 25 years.Additional reporting by Robert Wright in London More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Nvidia is facing its first real competitor in China. US export controls, designed to cut off China’s access to advanced chips and chipmaking gear, were supposed to ensure that no domestic rival could emerge. But the very sanctions meant to shut down China’s chipmaking sector have instead fuelled it, accelerating the rise of an unexpected challenger: Huawei.The paradox is clear — had the US never imposed chip export bans, the Chinese conglomerate would have continued to rely on Taiwan Semiconductor Manufacturing Company for its chips. Chinese chips would have probably remained second-tier, reliant on foreign technology with little urgency to innovate. Instead, by sanctioning Huawei and cutting it off from advanced US chips, Washington has become the greatest driver of the technological self-sufficiency it sought to prevent.Huawei together with Chinese chipmaker SMIC — which is also under US sanctions — has made a key breakthrough in chipmaking, improving the yield of its latest AI chips to about 40 per cent, doubling from 20 per cent a year ago.Yield, the percentage of functional chips in a batch without defects, is a critical metric in chipmaking. Defects in chips are inevitable, especially in advanced chips. Shrinking transistor sizes and complex chip designs raise failure rates. Even slight variations in production and impurities in materials can cause malfunctions. Advanced chips are built in multiple layers, where misalignments add another layer of risk. Therefore, yields of between 30 and 40 per cent are common for new chip production lines, improving significantly as manufacturing is refined. Huawei reaching this crucial threshold — despite limited access to advanced fabrication tools — marks a turning point for its AI chip business, with the higher yields making its production line profitable for the first time.Challenges remain. Nvidia’s dominance is reinforced by its deeply entrenched software ecosystem and developer base, making a shift to alternatives difficult. Meanwhile, local chipmakers’ access to advanced manufacturing gear remains limited, meaning less efficient fabrication. Performance is another concern. Critics argue that Huawei’s chips lag behind Nvidia’s in performance per unit.However, a fundamental shift in the AI sector could work in Huawei’s favour. AI can be categorised into two markets: training — where AI models are created; and inference — where they are deployed to generate real-world responses. While training happens once, inference happens billions of times in real-world use. This shift towards inference-heavy workloads marks the next stage of competition for chip companies.For example, creating AI models such as OpenAI’s GPT-4 uses high-performance training chips. But once trained, deploying it to users requires a far greater number of lower-power inference chips. As AI inference becomes more prevalent, demand for cost-efficient chips will increase. In China, where AI chips are in short supply, Huawei may have an edge despite trailing Nvidia in performance. Scaling up the number of chips could help bridge this gap. Parallel processing allows multiple chips to work together, distributing the workload and combining results for the final output.Chinese tech giants such as Baidu and ByteDance are shifting to Huawei’s AI chips for deep-learning workloads, potentially setting a precedent for other countries seeking non-Nvidia alternatives.But the broader battle over chips extends far beyond Huawei. China, the largest chip consumer in the world, is a market Nvidia cannot afford to lose. Analysts estimate that last year alone, Nvidia made $12bn from 1mn H20 AI chips sold to China. That a single product generated revenue equivalent to nearly a tenth of the company’s annual total underscores how critical the Chinese market remains to Nvidia.Yet Washington’s greatest miscalculation may not be underestimating China’s chipmaking capabilities, but rather overlooking the forces that drive technological progress. History has shown that every industrial power that has tried to suppress a rival’s technological rise has, at best, delayed it — and at worst, accelerated it. Chips are no exception. The chip war is far from over, but in the long run, the US may have ensured that it is a war China cannot [email protected] More

Wall Street stocks fell for the second day in a row on rising concerns Donald Trump’s tariffs will deal a blow to the US economy. The blue-chip S&P 500 was down around 0.9 per cent on Tuesday afternoon, while the tech-heavy Nasdaq Composite dipped 0.2 per cent. The S&P 500 briefly on Tuesday fell below the November 5 closing price, meaning the gauge had wiped out all of its gains since the election. But it recovered slightly above those levels later in the session. Stocks had initially rallied after Trump’s election victory, with investors betting that his promise of tax cuts and looser regulation would boost corporate profits.As recently as two weeks ago, the S&P was at an all-time high, up more than 6 per cent since the vote.However, those gains have since been largely erased as investors fret that the impact of Trump’s aggressively protectionist trade policy will hurt the US economy.On Tuesday, the US imposed 25 per cent tariffs on Canada and Mexico, and an additional 10 per cent levy on China. All three countries indicated that they intended to take retaliatory measures in response, escalating fears of a trade war. More

US farmers reacted with fury to President Donald Trump’s tariffs on imports from Canada, Mexico and China, saying a trade war will threaten their markets, push up the cost of inputs such as fertiliser and “take a toll on rural America”.Farmers expressed particular concern about the impact of retaliatory tariffs, saying they will restrict their access to some of the US’s most important export markets for staples including corn, soyabeans, red meat and pork, and urged Trump to negotiate a swift end to the conflict.“Contrary to what the president thinks, this means nothing but pain,” said Aaron Lehman, head of the Iowa Farmers Union. “Our domestic markets aren’t prepared to pick up the slack and that means lower prices for what we grow.”Washington moved on Monday to hit most Canadian and Mexican imports with 25 per cent tariffs, and outlined plans to double levies on Chinese products. Beijing responded by threatening 10 per cent to 15 per cent tariffs on US agricultural goods, ranging from soyabeans and beef to corn and wheat, from March 10. Canada also said it would impose levies on US imports, and Mexico said it would follow suit. Farmers fear the frictions will cause unnecessary harm to a sector struggling with what National Corn Growers Association president Kenneth Hartman Jr called “a troubling economic landscape” because of depressed commodity prices.“Farmers are frustrated,” said Caleb Ragland, American Soybean Association president. “Tariffs are not something to take lightly and ‘have fun’ with.”“Not only do they hit our family businesses squarely in the wallet, but they rock a core tenet on which our trading relationships are built, and that is reliability,” he added.Sector leaders warned that countries such as Brazil were well positioned to step in if trade tensions prompted importers to turn their backs on the US and seek alternatives.Brazil and other soyabean producers were expecting abundant crops this year, Ragland said, and “are primed to meet any demand stemming from a renewed US-China trade war”.Joe Schuele, vice-president of the US Meat Export Federation, said: “A lot of times, people will associate trade tensions with the various governments, but what we’re really impacting here are business relationships that have taken years, in some cases decades to build.”“Exports have been a real driver that have kept the US meat and livestock sectors thriving at a time when a lot of agriculture is hurting.”Analysts said China has long sought to diversify away from US agricultural goods such as soyabeans and that the latest round of the trade war will only entrench that trend.Arlan Suderman, chief commodities economist at broker StoneX, said China had recently begun to favour soyabean imports from countries with weaker currencies and more favourable exchange rates than the US such as Brazil.“The dollar being so strong, that has really been pricing US commodities out for a number of years,” he said. “Right now, it’s 70 cents per bushel cheaper to get soyabeans from Brazil than the US Gulf.”US ranchers, who export roughly 10 per cent of their pork production to Mexico, say they will also lose out to their rivals in Brazil, Chile and Argentina.“This gives our customers an incentive to look elsewhere,” said Schuele. “We believe that the quality of US meat sets us apart from our competitors but, at some point, even the most loyal customer is going to have to start looking at alternatives.”Some content could not load. Check your internet connection or browser settings.Losing market share in Mexico will make it more difficult for US ranchers to produce bacon and ribs for domestic markets because they rely on Mexican meat processors to purchase their other, less-popular cuts. That will eventually raise prices for US consumers, said Schuele.Zippy Duvall, head of the American Farm Bureau Federation, said that while farmers supported Trump’s goals of ensuring security and fair trade with other nations, the additional levies, combined with the expected retaliatory tariffs, “will take a toll on rural America”.“For the third straight year, farmers are losing money on almost every major crop planted,” he said. “Adding even more costs and reducing markets for American agricultural goods could create an economic burden some farmers may not be able to bear.”Farmers fear the same negative impact as Trump’s last trade war, with China in 2018, which led to $27bn in losses for US agriculture, according to estimates by farming groups, though farms received as much as $23bn in compensation from the federal government for the trade disruptions.  This time, however, the sector is less well-prepared: commodity prices are down almost 50 per cent from three years ago and costs for inputs such as seeds, pesticides and fertiliser are higher.Fertiliser might become even more expensive. About 80 per cent of US supplies of potash come from Canada, the world’s largest producer. Such imports will also be hit by Trump’s tariffs.Nutrien, one of Canada’s largest potash producers, said the company had moved “as much potash south of the border as possible ahead of the spring planting season”.“While we will continue to serve our US customers, the cost of tariffs would ultimately be borne by US farmers,” the company said.US shoppers are also expected to suffer as a result of higher prices for imported fruits and vegetables such as Mexican avocados. “Costs will have to be absorbed because someone has to pay, and a significant part will be passed along to consumers,” said Rebeckah Adcock, of the International Fresh Produce Association, a trade body. Additional reporting by Susannah Savage More