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Why America’s financial plumbing has seized up

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HOUSEHOLDS ARE frantically stocking up on essentials such as loo roll. But in financial markets, the staple that no one can do without in times of stress is cash—the flushing mechanism of the world economy. In theory, it should never dry up; money can be printed. But when firms are desperate for cash it puts a potentially devastating strain on the plumbing of the global financial system. That is why in the past week America’s Federal Reserve has unleashed a huge amount of liquidity. Foreign central banks have joined in. Many face the additional challenge of a strengthening dollar (see article).

Unlike the 2007-09 financial crisis, when problems in the financial system caused an economic meltdown, the spread of the covid-19 disease has caused a health and economic crisis that has caught banks, financial markets and business in its wake. Big and small firms realise that they are facing— at the least—months of scant revenues, yet still have bills and debts to pay.
Some are better equipped than others (see left-hand chart). The operating expenses (opex), like wages and rent, of all nonbank S&P 500 companies in 2019 amounted to $2.6trn. The same firms held $1.7trn in cash and liquid securities at the end of that year. On average, that was about seven months of opex. But this cash is unevenly distributed. Apple could pay for six years of opex with its $200bn war chest. Many big utilities, such as Edison International, carry only enough cash to cover a week’s worth.

The quickest way for investors, firms and banks to raise cash is to sell liquid assets. Investors moved first. Their priority was to liquidate holdings of risky assets, like stocks and high-yield bonds, and buy safe assets like Treasuries. Markets moved accordingly: the S&P 500 has sold off hard and fast (see right-hand chart) and bond yields rallied. But companies and banks tend to hold their liquid assets in Treasuries. When their need for cash became dire, they dumped even these.
Asset sales help reallocate the stock of existing cash. For every investor selling stocks or bonds to raise cash, there are those willing to take the other side—like Warren Buffett, the fabled “be greedy only when others are fearful” investor, who held $125bn in “dry-powder” at Berkshire Hathaway, his investment firm, at the end of 2019. He has already snapped up shares in Delta, an American airline. But reallocation can only do so much. When all firms face the same economic shock, they need a vast increase in the supply of credit.

Unfortunately, credit is not readily available. Funding strains have emerged across markets globally. In January American firms that issued risky high-yield debt paid around 3.5 percentage points more to issue a bond than the government did. This spread is now above 8 percentage points (see chart 3). But even if firms did want to issue bonds at such rates, they cannot. Corporate debt markets are virtually shut in America and Europe.
If bonds are unavailable, firms turn to banks. Many have credit lines enabling them to borrow whenever they need, up to a certain limit (akin to a credit card). Last week Boeing, an aircraft manufacturer, drew down its entire $13.8bn line in order to stockpile cash. In America, there have been reports of firms of all stripes—from chipmakers to casino and cruise operators—doing the same. In Europe Aercap Holdings, an aircraft-leasing firm, said it was drawing down its $4bn credit line.
But banks have problems of their own. The first is that the thicket of global bank regulations imposed on them since the financial crisis may be exacerbating the funding crunch. Take regulations concerning “risk-weighted assets”. Banks must hold a certain amount of capital relative to the size and riskiness of the assets, such as loans, they have on their books. But as volatility in the value of the assets rises, they become more risky, forcing banks to shrink their balance-sheets. Another example is the new Current Expected Credit Losses rule, which came into effect for public companies in January. It forces banks to provision for bad loans as the probability of default rises, rather than waiting until counterparties start missing payments before booking losses.
The second problem banks have is their own scramble for cash. As lenders make loans, their balance-sheets grow. But balance-sheet is a scarce resource, especially in the current climate. In order to issue more loans banks must either shrink other assets, or find extra capital and funding. They are doing both. Banks have pulled back from market-making activity, as evidenced by the stubbornly high interest rates in the “repo” market, where firms and banks can swap cash overnight in exchange for posting Treasuries as collateral. Ordinarily banks might jump at the opportunity to arbitrage the difference away by hoovering up Treasuries. Yet intermediating in the repo market is something they can ill afford at present. Banks are also retaining more of their profits in order to build up capital. On March 15th America’s six largest banks announced they were halting share buybacks for three months.

Their backstop is the Federal Reserve, America’s lender of last resort. It has gone out of its way to ease the blockages in the financial system by encouraging banks to lend. It started on March 12th when the New York Fed, a branch of the central bank, made $1.5trn (an ocean of cash) available for repo operations. In addition to cutting interest rates on March 15th the Fed announced it would buy up $500bn-worth of Treasuries and $200bn-worth of mortgage-backed securities. By taking assets off the banks’ hands, it enables them to expand lending. It cut the rate on the “discount window”, a tool for banks to borrow from the Fed, and encouraged them to use it freely. It suggested that banks could dip into their capital buffers, worth $1.9trn, and their liquidity buffers, another $2.7trn, to lend to firms and households, which helped ease their regulatory constraints. Then, on March 18th, the Fed announced it would start buying short-dated commercial paper, to provide direct support for big companies. It also relaunched a facility to lend directly to “primary dealers”, a group of financial firms that do not have direct access to typical Fed lending channels.
These steps are the right ones. Other central banks are taking similar steps. For banks that promise to lend cash the European Central Bank has cut the rate at which banks can borrow from the central bank below the rate at which they are compensated for deposits. It says it will also expand its bond-buying programme by a whopping €750bn ($818bn). The Bank of Japan, meanwhile, is buying up company shares directly, too.
The scramble for cash will continue. If enough liquidity is created quickly, the long-term damage to the real economy will be minimised, though. And if firms know that they can get cash whenever they need it, they might not need quite so much in the first place. Rather like loo paper. ■
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This article appeared in the Finance and economics section of the print edition under the headline “Down the drain”
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No one is likely to win the oil-price war

SAUDI ARABIA and Russia are used to fighting their enemies via proxies. But the oil-price war that has broken out between them is head-on and has swiftly escalated. It started when Russia refused to slash production during a meeting with the Organisation of the Petroleum Exporting Countries in Vienna on March 6th. Saudi Arabia, OPEC’s de facto leader, hit back with discounts to buyers and a promise to pump more crude. Shortly thereafter it said it would provide customers with 12.3m barrels a day (b/d) in April, about 25% more than it supplied last month—and a level it has never before attained. Russia said it could raise output, too, adding up to 500,000 b/d to its 11.2m b/d. The price of Brent crude plunged by 24%, to $34 a barrel, on March 9th—its steepest one-day drop in nearly 30 years.
Amid turmoil in global markets unleashed by the plummeting oil price, and panic about its impact on the global economy, Saudi Arabia upped the ante again on March 11th, ordering Saudi Aramco, its state-owned oil giant, to raise national production capacity by a further 1m b/d. Is the kingdom merely strengthening its bargaining position to force Russia back to the table? Or is it waging a fierce price war to crowd out rivals that will instead ensure what analysts at Bernstein, an investment firm, call “mutually assured destruction”? The answer may determine how long the disruption will last.

The fallout caps a seismic decade for oilmen. Power has shifted between Saudi Arabia, Russia and America (see chart). In 2014 Saudi Arabia sought to check America’s ascendant shale industry by flooding the market with oil. The result was cataclysmic for all producers. Two years later OPEC restored its grip on output by forging an alliance with Russia and others.

In recent years, though, Russia has flouted the terms of its deals with OPEC. Its oil companies, led by Rosneft, have chafed at market share lost to American frackers. As troubling for Russia, America has become less shy about leaning on foreigners. In December it announced sanctions to delay Nord Stream 2, a Russian gas pipeline to Europe. In February America imposed sanctions to punish Rosneft for its dealings with Venezuela.
Russia’s partnership with OPEC has won it new influence in the Middle East, while Saudi Arabia has borne most of the burden of production cuts. The Saudis are getting tired of the role of swing producer. That position has become all the more invidious since January, when the outbreak of covid-19 in China, the world’s biggest oil importer, put downward pressure on prices.
The Saudi decision to open the spigots is nevertheless extremely rash. With the coronavirus raging, global appetite for oil may decline in 2020 for only the third time in more than 30 years. Increasing supply at a time of falling demand may send the price of Brent crude below $30 in the second quarter, estimates Citi, a bank.
The pain may be most acute for smaller, unstable countries dependent on oil revenue, such as Nigeria. Iraq’s government is already teetering—a collapsing oil price may topple it. The movement of forward contracts on Gulf currencies pegged to the dollar, such as Oman’s rial, suggest incipient concerns about the ability to sustain the pegs if dollar revenues from oil remain depressed for a long time.

America, too, will be hit hard. Cheap oil used to be a boon to America’s economy. That is no longer the case. In a viral outbreak, savings on petrol are unlikely to translate into more spending on other things, especially ones that involve crowds. Even if it did, any boost to the economy from consumers would be outweighed by damage to shale states such as Texas and North Dakota. Breakeven prices—those oil producers need to turn a profit—in America’s shale basins range from $23 to $75 a barrel, according to the Dallas Federal Reserve. Production cuts and lay-offs are likely.
Making matters worse, shale firms were suffering even before the latest sell-off, as investors questioned their capacity for sustained profits. Capital markets have all but closed to the industry. It will not collapse; many shale firms are hedged against falling prices this year. Those on their knees may well be taken over by bigger competitors. Analysts say larger rivals such as ExxonMobil have the balance-sheets to cope with cheap oil.

Russia may fail in its attempt to kill off America’s shale industry. Moreover, weak oil prices will hurt its economy. But unlike Saudi Arabia, whose currency is pegged to the dollar, the rouble floats. When oil prices fall, the currency does, too, lowering production costs. On March 10th Russia’s finance ministry said that the country had enough foreign-currency reserves to withstand a decade of prices hovering between $25 and $30. It seems in no hurry to go back to negotiations with OPEC.
With some of the world’s cheapest oil, Saudi Arabia may be able to pile more pressure on the Russians. Aramco has more than 50 years of reserves, and costs per barrel of less than $9, according to Rystad Energy, a data firm, compared with $15 for Russia. Still, Saudi Arabia may struggle to maintain production—even 12.3m b/d will require tapping its vast inventories.
Moreover, the kingdom’s budget requires an oil price of more than $80, estimates the IMF. Goldman Sachs, a bank, reckons that if it increases output and oil prices recover, its finances will weather temporary pain. But if the virus persists and demand keeps plunging, the damage may be more lasting. It is a price war that no one looks likely to win. ■
This article appeared in the Finance and economics section of the print edition under the headline “Scorched earth”
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Corporate bonds and loans are at the centre of a new financial scare

OVER THE past decade officials—and some bankers—have tried to redesign the financial system so that it acts as a buffer that absorbs economic shocks rather than as an amplifier that makes things worse. It faces a stern test from the covid-19 virus and the economic ruptures it has triggered, not least a Saudi-led oil-price war (see next article). The locus of concern is in the world’s ocean of corporate debt, worth $74trn. On Wall Street the credit spreads of risky bonds have blown out, while in Italy, a bank-dominated economy that is already in lockdown, the share prices of the two biggest lenders, Intesa Sanpaolo and UniCredit, have dropped in the past month by 28% and 40% respectively.
The scare has four elements: a queasy long-term rise in borrowing; a looming cash crunch at firms as offices and factories are shut and quarantines imposed; the gumming-up of some credit markets; and doubts about the resilience of banks and debt funds that would bear any losses.

Take the borrowing first. Companies came out of the 2007-09 financial crisis in a relatively sober mood, but since then have let rip. Global corporate debt (excluding financial firms) has risen from 84% of GDP in 2009 to 92% in 2019, reckons the Institute of International Finance. The ratio has risen in 33 of the 52 countries it tracks. In America non-financial corporate debt has climbed to 47% of GDP from 43% a decade ago, according to the Federal Reserve.

Underwriting standards have slipped. Two-thirds of non-financial corporate bonds in America are rated “junk” or “BBB”, the category just above junk. Outside America the figure is 39%. Firms that you might think have rock-solid balance-sheets—AT&T—have seen their ratings slip, while others have been saddled with debts from buyouts. Naughty habits have crept in: for example, using flattering measures of profit to calculate firms’ leverage.
All this leaves business more vulnerable to the second factor, the shock from covid-19 and the oil-price slump. Some 7% of non-financial corporate bonds globally are owed by industries being walloped by the virus, such as airlines and hotels. With oil close to $35, America’s debt-addicted frackers and other oil firms are in trouble. Energy is 8% of the bond market.
A far broader set of firms could face a cash crunch if temporary shutdowns and quarantines spread. In China over the past months, financial distress—and informal forbearance—has been widespread. One multinational says it has relaxed its payment terms with suppliers in China. HNA, an outrageously indebted conglomerate than runs an airline, has been bailed out.

To get a sense of the potential damage in other countries The Economist has done a crude “cash-crunch stress-test” of 3,000-odd listed non-financial firms outside China. It assumes their sales slump by two-thirds and that they continue to pay running costs, such as interest and wages. Within three months 13% of firms, accounting for 16% of total debt, exhaust their cash at hand. They would be forced to borrow, retrench or default on some of their combined $2trn of debt. If the freeze extended to six months, almost a quarter of all firms would run out of cash at hand.
The near-certainty of rating downgrades and defaults in the travel-related and oil industries, and the possibility of a broader crunch, is the third concern. Credit derivatives, the most actively traded part of the fixed-income markets, have recoiled. The CDX index, which reflects the cost of insuring against default on investment-grade debt, is at its highest level since 2016, as is the iTraxx crossover, which covers riskier European borrowers. Out of the public eye, privately traded debt may now only change hands at heavily discounted prices. The issuance of new debt has “dried up”, says the head of a big fund manager. This could fast become a serious problem because firms need to refinance $1.9trn of debt worldwide in 2020, including $350bn in America.
Fractured markets mean the fourth element, the resilience of the institutions that make loans and buy bonds, is critical. A majority of American bonds are owned by pension funds, insurers and mutual funds that can cope with losses. But some will be reluctant to buy more. And 10-20% of all American corporate debt (bonds and loans) is owned by more esoteric vehicles such as collateralised-loan obligations and exchange-traded funds. Such exposures have yet to be fully tested in an extended period of severe market stress.
Who, then, can act as a source of stability and fresh lending? Some big cash-rich firms such as Apple could grant more favourable payment terms to their supply chains. Private-equity firms have capital to burn. But in the end much will rest on the banks, who have the relationships and flexibility to extend credit to tide firms over. America’s banks have their flaws—Goldman Sachs is sitting on $180bn of loans and lending commitments with ratings of BBB or below, for example. But broadly speaking they are in reasonable shape, with solid profits and capital positions.

Outside America the picture is less reassuring. Europe’s banks make puny profits, partly because interest rates are so low; Italian banks had a return on equity of just 5% last year. Since the virus struck, the cost of insuring their debt against default has flared up, hinting that they could yet become a source of contagion. State-backed banks in China and India will do as directed by politicians. But they are already labouring under large bad debts.
Global business may need a giant “bridging loan” to get through a tough few months. And governments may need to intervene to make it happen: by flooding credit markets with liquidity; by cutting taxes to get cash to companies; and by prodding banks to lend and show forbearance. The world’s financial system has not yet become a source of contagion in its own right. But neither has it shown it can spontaneously help firms and households absorb a nasty but transitory shock.■
This article appeared in the Finance and economics section of the print edition under the headline “In a sea of debt”
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Will the next iPhone charge wirelessly?

Happy 10th birthday, iPhone
You may never have to plug in your iPhone again. Apple has joined an industry group devoted to wireless charging, strengthening existing rumors that the next iPhone will charge without a cord. The Wireless Power Consortium, which is made up of some 200 organizations that promote a single wireless charging standard, confirmed to CNNTech that Apple joined the group last week. IPhone rumors swirl months before each new version is announced, and hype around the so-called ‘iPhone 8″ is particularly high: Apple (AAPL) is expected to unveil a major redesign of the this fall to mark the 10-year anniversary of the smartphone. The company has already shown interest in doing away with cumbersome cords. The Apple Watch charges wirelessly, provided consumers spend $79 on a magnetic charging dock. And the latest MacBook now comes with only one USB port. Related: Apple stock nears a record high Apple would also create another iPhone revenue stream by selling a wireless charging station separately. The feature would simplify charging for smartphone owners. Rather than plugging in one’s phone, a user would only need to place it on the charging dock. Apple said in a statement Monday it was joining the Wireless Power Consortium to contribute its ideas as wireless charging standards are developed. As for the speculated possible features of the next iPhone, other rumors include an edge-to-edge display, a glass body and the removal of the home button.

Mexico ready to retaliate by hurting US farmers

Anti-Trump protests take place across Mexico
Mexico is ready to hit the U.S. where it hurts: Corn. Mexico is one of the top buyers of American corn in the world today. And Mexican senator Armando Rios Piter, who leads a congressional committee on foreign relations, says he will introduce a bill this week where Mexico will buy corn from Brazil and Argentina instead of the United States. It’s one of the first signs of potential concrete action from Mexico in response to President Trump’s threats against the country. “I’m going to send a bill for the corn that we are buying in the Midwest and…change to Brazil or Argentina,” Rios Piter, 43, told told CNN’s Leyla Santiago on Sunday at an anti-Trump protest in Mexico City. He added: It’s a “good way to tell them that this hostile relationship has consequences, hope that it changes.” American corn goes into a lot of the country’s food. In Mexico City, from fine dining restaurants to taco stands on the street, corn-based favorites like tacos can be found everywhere. Related: Mexican farmer’s daughter: NAFTA destroyed us America is also the world’s largest producer and exporter of corn. American corn shipments to Mexico have catapulted since NAFTA, a free trade deal signed between Mexico, America and Canada. American farmers sent $2.4 billion of corn to Mexico in 2015, the most recent year of available data. In 1995, the year after NAFTA became law, corn exports to Mexico were a mere $391 million. Experts say such a bill would be very costly to U.S. farmers. “If we do indeed see a trade war where Mexico starts buying from Brazil…we’re going to see it affect the corn market and ripple out to the rest of the ag economy,” says Darin Newsom, senior analyst at DTN, an agricultural management firm. Rios Piter’s bill is another sign of Mexico’s willingness to respond to Trump’s threats. Trump wants to make Mexico pay for a wall on the border, and he’s threatened taxes on Mexican imports ranging from 20% to 35%. Trump also wants to renegotiate NAFTA. He blames it for a flood of manufacturing jobs to Mexico. A nonpartisan congressional research report found that not to be true. Related: Mexico doubles down on Trump ‘contingency plan’ Still, Trump says he wants a better trade deal for the American worker — though he hasn’t said what a better deal looks like. All sides signaled two weeks ago that negotiations would begin in May after a 90-day consultation period. But Trump says if negotiations don’t bear the deal he wants, he threatens to withdraw from NAFTA. Such tough talk isn’t received well by Mexican leaders like Rios Piter. He’s not alone. Mexico’s economy minister, Ildefonso Guajardo, said in January Mexico would respond “immediately” to any tariffs from Trump. “It’s very clear that we have to be prepared to immediately be able to neutralize the impact of a measure of that nature,” Guajardo said Jan. 13 on a Mexican news show. –Shasta Darlington contributed reporting to this story

America's NAFTA nemesis: Canada, not Mexico

NAFTA explained
America and Canada have one of the world’s biggest trade relationships. President Donald Trump met for the first time Monday with Canada’s Prime Minister Justin Trudeau. “We have a very outstanding trade relationship with Canada,” Trump said at the news conference. But the U.S.-Canada trade relationship over the years has not been as smooth as you might think. There have been trade wars, acts of retaliation, allegations of dumping and jobs lost. “Our trading relationship obviously is strong…but the relationship has been rocky, despite the agreements we have in place,” says Stuart Trew, an editor at the Canadian Centre for Policy Alternatives, a research group in Ottawa, Canada’s capital. Trump has often slammed Mexico and NAFTA, the trade agreement between the U.S., Mexico and Canada. But Canada is rarely mentioned. Yet, there have been more NAFTA dispute claims against Canada — almost all by U.S. companies — than against Mexico. Even today, Canada has stiff tariffs against the United States and the two sides only recently resolved a bitter dispute over meat. Most leaders and experts stress that trade ties between the two nations are strong and mostly positive. But Canada and America have had plenty of battles along the way. Now Trump wants to renegotiate NAFTA, which will be on the top of the agenda for his meeting with Trudeau. 1. Canada gets in more NAFTA trouble than Mexico Listening to Trump, you might think Mexico is the bad actor of NAFTA. But since NAFTA’s inception in 1994, there have been 39 complaints brought against Canada, almost all by U.S. companies. Known in the industry as the investor state dispute settlements, it allows companies to resolve cases under a special panel of NAFTA judges instead of local courts in Mexico, Canada, or the U.S. There’s only been 23 complaints against Mexico. (By comparison, companies from both Mexico and Canada have filed a total of 21 complaints against the U.S.) And increasingly, Canada is the target of American complaints. Since 2005, Canada has been hit with 70% of the NAFTA dispute claims, according to CCPA, a Canadian research firm. 2. The U.S. – Canada lumber battle NAFTA isn’t the only sore area. In 2002, the U.S. slapped a roughly 30% tariff on Canadian lumber, alleging that Canada was “dumping” its wood on the U.S. market. Canada rejected the claim and argued the tariff cost its lumber companies 30,000 jobs. “It was a very sour point in Canadian – American relations for quite a while,” says Tom Velk, an economics professor at McGill University in Montreal. The dispute had its origins in the 1980s, when American lumber companies said their Canadian counterparts weren’t playing fair. Whether Canada actually broke the rules is a matter of dispute. Canadian officials deny that the government is subsidizing softwood lumber companies in Canada. American lumber companies still allege that it does, and a U.S. Commerce Department report found that Canada was providing subsidies to lumber companies in 2004. It didn’t say whether the subsidies were ongoing. According to the allegations, Canada subsidized lumber companies because the government owns many of the lands where the wood comes from. That subsidy — on top of Canada’s huge lumber supply — allowed Canada to price its lumber below what U.S. companies can charge. The World Trade Organization ultimately sided with Canada, denying America’s claim and the two sides came to an agreement in 2006 to end the tariff. However, that agreement and its ensuing grace period expired in October, and the two sides are back at it again. The Obama and Trudeau administrations couldn’t reach a compromise before Obama left office and it remains a contentious trade issue with U.S. lumber companies calling once again for tariffs. Related: ‘Without NAFTA’ we’d be out of business 3. Smoot-Hawley triggers U.S. – Canada trade war Things got even worse during the Great Depression. In 1930, Congress wanted to protect U.S. jobs from global trade. So the U.S. slapped tariffs on all countries that shipped goods to America in an effort to shield workers. It was called the Smoot-Hawley Act. Today, it is widely accepted that this law made the Great Depression worse than it was. Canada was furious, and retaliated more than any other country against the U.S., sparking a trade war. “Canada was so incensed that…they raised their own tariff on certain products to match the new U.S. tariff,” according to Doug Irwin, a Dartmouth Professor and author of “Peddling Protectionism: Smoot-Hawley and the Great Depression.” For example, the U.S. increased a tariff on eggs from 8 cents to 10 cents (these are 1930s prices, after all). Canada retaliated by also increasing its tariff from 3 cents to 10 cents — a threefold increase. Exports dwindled sharply: in 1929, the U.S. exported nearly 920,000 eggs to Canada. Three years later, it only shipped about 14,000 eggs, according to Irwin. Related: Remember Smoot-Hawley: America’s last major trade war 4. Canada’s sky high tariffs on U.S. eggs, poultry, milk Fast forward to today. Smoot-Hawley is long gone, but Canada continues to charge steep tariffs on U.S. imports of eggs, chicken and milk. For instance, some tariffs on eggs are as high as 238% per dozen, according to Canada’s Agriculture Department. Some milk imports, depending on the fat content, are as high as 292%. “They’re so onerous that you can’t bring it across. There’s no American eggs in Quebec,” says Velk. According to Canada’s Embassy in the U.S., reality is much different. Its officials say that despite some stiff tariffs, Canada is one of the top export markets for American milk, poultry and eggs. The U.S. does have tariffs on some goods coming from all countries, but they are not nearly as high as Canada’s. Experts say these tariffs continue to irk some U.S. dairy and poultry farmers, some of whom are challenged to sell into the Canadian market. But they doubt much will change since the tariffs have been in place for decades now. Related: Those Reagan tariffs Trump loves to talk about 5. COOLer heads and the future of NAFTA Despite all these disputes, experts stress this trade relationship is still one of the best in the world. In fact, the two countries are so interconnected now, when trade disputes erupt sometimes American companies will side with Canadian companies and against U.S. lawmakers. For example, Canadian meat producers disputed a U.S. law that required them to label where the cattle was born, raised and slaughtered. Canadians said the law discriminated against its meat from being sold in the U.S. and took the case to the WTO. The WTO sided with Canada, and last December, Congress repealed the country-of-origin-labeling law. American meat producers — whose business is intertwined with Canada — actually supported their counterparts in Canada, arguing the regulation was too burdensome. As for Trump’s proposal of tearing up NAFTA, many American and Canadian experts say that it’s not worth it to renegotiate or end the agreement. The three countries that are part of the agreement are so enmeshed with each other that untangling all that integration would be detrimental to trade and economic growth. –Editor’s note: This story was originally published on August 11, 2016. We have since updated it.

Verizon's plan: Consumers win, investors lose

Inside Verizon’s device testing lab
Verizon has brought back its unlimited data plan. That’s great if you’re a Verizon customer. But it is terrible news for its investors. Verizon (VZ) stock fell nearly 1.5% in early trading Monday. It’s now down about 10% so far this year, making it the Dow’s worst performer of 2017. Verizon’s move is a clear sign the company has to pull out all the stops to remain competitive with wireless rivals AT&T (T), Sprint (S) and T-Mobile (TMUS). “In recent months, both T-Mobile and Sprint had some success taking additional share from Verizon by virtue of their unlimited offerings,” wrote Morgan Stanley analysts in a report Monday morning. That may explain why shares of T-Mobile and Sprint, which is now controlled by Japanese tech conglomerate SoftBank, are both up this year while Verizon is down. T-Mobile and Sprint have also been perennially linked as possible merger partners. But the new telecom price war isn’t the only problem for Verizon. AT&T recently acquired satellite broadcast provider DirecTV, a move that makes Ma Bell more competitive against Verizon in the battle to control people’s living rooms. Verizon offers its own FiOS broadband TV service. Related: Verizon brings back unlimited data plans And AT&T is also making a much bigger bet on content, with plans to purchase CNN’s parent company Time Warner (TWX). Verizon already owns AOL and is looking to buy the core assets of Yahoo to bolster its own digital content offerings. But the Yahoo (YHOO) deal could fall apart in the wake of revelations of massive data breaches at Yahoo over the past few years. Yahoo recently said it hopes that the deal with Verizon will close in the second quarter of this year. It was originally supposed to be finalized by the first quarter. However, in its latest earnings release, Verizon simply said that it “continues to work with Yahoo to assess the impact of data breaches” — not that it expected the deal to close anytime soon. Verizon has a lot on its plate, which could be making investors nervous. In addition to the Yahoo deal, the company is also in the process of buying the fiber optic network of XO Communications. And it’s selling its data center business to Equinix (EQIX). There also have been rumors in the past few weeks that Verizon might even consider buying cable provider Charter Communications (CHTR). That may be more than Verizon can realistically handle right now. But nothing may be off the table for Verizon given how competitive the wireless world is these days. Anything that could give Verizon a leg up on AT&T, Sprint and T-Mobile might be possible. Related: Charter shares popped on report of possible Verizon takeover Still, it’s worth noting that shares of AT&T are lower this year too, down about 5%. And Verizon and A&T have something in common that Sprint and T-Mobile lack — Verizon and AT&T pay gigantic dividends. Companies that have big dividend yields haven’t fared as well since Donald Trump was elected. Investors are betting on a sizable stimulus package from him and the Republican Congress, which may be fueled in part by debt. That’s caused bond yields to rise — and that makes shares of big dividend payers like Verizon a lot less attractive. The Federal Reserve is expected to raise interest rates a few times this year too. That could push bond yields even higher. So Verizon faces many big challenges that could hurt its stock this year. That’s why Verizon, nicknamed Big Red because of its logo’s crimson hue, may see its stock in the red for the foreseeable future.

Tesla will sell electric cars in the Middle East

Elon Musk in 90 Seconds
Tesla is bringing its electric cars to the heart of the oil producing world. The automaker announced Monday that its first official venture in the Middle East will be in the United Arab Emirates. The first cars — the Model S and Model X — will hit the road this summer. “Timing seems to be good to really make a significant debut in this region starting in Dubai,” Tesla (TSLA) CEO Elon Musk said at the World Government Summit in Dubai. Tesla owners will have access to two existing supercharging stations in the UAE, and Telsa plans to open five more by the end of the year. Despite sitting on huge oil and gas reserves, the UAE has ambitious plans to go green. Last month it said it will invest $163 billion to boost alternative energy use over the next three decades. Related: Tesla reveals what it will charge for a charge It’s the latest in a series of expansion announcements for Tesla. Last week, Musk hinted that Tesla may soon come to India. Musk has also teased plans to build “heavy-duty trucks and high passenger-density urban transport” as well developing a ride-hailing network, which could be similar to Uber. Speaking in Dubai, the entrepreneur expounded on the future of robotics. “We will see autonomy and artificial intelligence advance tremendously,” Musk said. “In probably 10 years, it will be very unusual for cars to be built that are not fully autonomous.” Related: Elon Musk’s surprising secret weapon: Trump? But he also warned of the “disruptive” nature of autonomous vehicles. “That disruption I’m talking about will take place over about 20 years. Still, 20 years is a short period of time to have something like 12% to 15% of the workforce be unemployed.” Musk said governments must pay close attention to artificial intelligence, create sustainable transport and be wary of mass unemployment. “This will be a massive social challenge. Ultimately, we need to think about universal basic income. I don’t think we have a choice,” he said. “There will be fewer and fewer jobs that a robot cannot do better.” — Seth Fiegerman contributed reporting.

Swiss voters reject corporate tax overhaul

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Voters in Switzerland have shocked the political establishment by rejecting a reform plan that would have brought the country’s corporate tax system in line with international norms. The tax reforms, which were widely supported by the business community, would have removed a set of special low-tax privileges that had encouraged many multinational companies to set up shop in Switzerland. Experts say the future of Switzerland’s tax system is now unclear. The vote result could create headaches for firms that had been banking on their implementation, and deter companies who had been considering a move to the country. “They do not know what [tax] measures will be available… That is not a very solid basis for making investment decisions,” Peter Uebelhart, head of tax at KPMG in Switzerland, said in a video statement. Switzerland has come under intense pressure from G20 and OECD nations in recent years to clean up its tax system. The country runs the risk of being “blacklisted” by other nations if it doesn’t change its tax system by 2019. Many voters rejected the tax reform package over fears it might reduce the amount of revenue collected by the government, according to Stefan Kuhn, head of corporate tax at KPMG in Switzerland. That might have lead to tax hikes on the middle class. The current tax system gives preferential treatment to some companies with large foreign operations. International tax authorities say the rules amount to unfair corporate subsidies. Martin Naville, head of the Swiss-American Chamber of Commerce, said it’s possible that voters didn’t understand the complexities of the reforms. The measures were rejected by 59% of voters. “I think it’s a very bad day for Switzerland,” Naville said. “Clearly, the uncertainty and the credibility in the Swiss [system] has taken a massive hit.” Related: How Europe’s elections could be hacked Swiss authorities say they will move quickly to create a modified tax reform proposal. Naville said he hopes new rules are devised within the next few months. “All stakeholders now have to take responsibility to develop an acceptable competitive tax system, and to regain credibility regarding the famed political stability which gave Switzerland such an advantageous position,” he said in a statement. Naville hinted that potential tax reforms in the U.S. and U.K. could tempt Swiss-based companies to relocate, putting more pressure on Switzerland’s tax base.

Oil prices have doubled in a year. Here's why

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It’s a good day for OPEC. Data published Monday by the oil cartel show its members have largely complied with an agreement to slash production. The confirmation caps a remarkable year for OPEC, which was forced to devise a plan to boost prices after they fell to $26 per barrel in February 2016. The price collapse — to levels not seen since 2003 — was caused by months of growing oversupply, slowing demand from China and a decision by Western powers to lift Iran’s nuclear sanctions. Since then, the market has mounted a stunning turnaround, with crude prices doubling to trade at $53.50 per barrel. Here’s how major oil producers worked together to push prices higher: OPEC deal OPEC agreed major production cuts in November, hoping to tame the global oil oversupply and support prices. The news of the deal immediately boosted prices by 9%. Investors cheered even more after several non-OPEC producers, including Russia, Mexico and Kazakhstan, joined the effort to restrain supply. Crucially, the deal has stuck. The OPEC report published Monday showed that its members have — for the most part — fulfilled their pledges to slash production. The International Energy Agency agrees: It estimated OPEC compliance for January at 90%. UAE energy minister Suhail Al Mazrouei told CNNMoney on Monday that the results were even better than he had expected. The production cuts total 1.8 million barrels per day and are scheduled to run for six months. Related: OPEC has pulled off one of its ‘deepest’ production cuts Investors upbeat The OPEC deal took months to negotiate, and investors really, really like it. The number of hedge funds and other institutional investors that are betting on higher prices hit a record in January, according to OPEC. The widespread optimism is helping to fuel price increases. Higher demand The latest data from OPEC and the IEA show that global demand for oil was higher than expected in 2016, thanks to stronger economic growth, higher vehicle sales and colder than expected weather in the final quarter of the year. Demand is set to grow further in 2017 to an average of 95.8 million barrels a day, compared 94.6 million barrels per day in 2016. The IEA said that if OPEC sticks to its agreement, the global oil glut that has plagued markets for three years will finally disappear in 2017. Saudi oil minister: I don’t lose sleep over shale What’s next? Despite the stunning growth, analysts caution that prices may not go much higher. That’s because higher oil prices are likely to lure American shale producers back into the market. The total number of active oil rigs in the U.S. stood at 591 last week, according to data from Baker Hughes. That’s 152 more than a year ago. U.S. crude stockpiles swelled in January to nearly 200 million barrels above their five-year average, according to the OPEC report. “This vast increase in inventories is a result of a strong supply response from the U.S. shale producers, who were not involved in the OPEC agreement and who have instead been using the resultant price rally to increase output,” said Fiona Cincotta, an analyst at City Index. More supply could once again put OPEC under pressure.

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