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Trump rules on China investment spark confusion across global finance

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Brokers and other financial groups from New York to Hong Kong have been left scrambling to comply with a US presidential ban on investment in companies with alleged ties to the Chinese military.

Donald Trump’s executive order, which comes into effect on January 11, days before he leaves the White House, has flummoxed financial institutions, leaving the New York Stock Exchange banning a handful of Chinese companies, reinstating them days later, and on Wednesday banning them again under pressure from the Trump administration. On Thursday, concerns over how the blacklist will apply hit shares in US-listed Asian tech stalwarts Alibaba and Tencent.

Lawyers and financial executives say the ambiguously worded rules and guidance over how they will be enforced have sown confusion over how to avoid legal and financial penalties.

“The average financial institution is worried, ‘Am I going to be in trouble on Tuesday?’” said Paul Marquardt, a partner at law firm Cleary Gottlieb. “NYSE is a symptom, it is not the issue. The issue is really getting greater clarity on how far the new sanctions go.”

The hastily assembled five-page executive order signed by Mr Trump last November banned the purchase of shares in 31 Chinese companies believed to be tied to the People’s Liberation Army, including businesses like China Mobile and Huawei. However the order did not specify whether it also affected subsidiaries and affiliates of those companies — a group that includes the US shares of the three Chinese telecommunications companies NYSE has said it will delist.

Line chart of Performance since November 11, 2020 (%) showing Chinese telecoms have tumbled since Trump signed executive order

The Treasury had been slow to offer guidance on the order, but on December 28 it said subsidiaries would be included 60 days after it published a detailed list, which it has not yet done. In the absence of a list, NYSE reversed its decision to remove several companies on Monday.

That drew recriminations from anti-China hawks in the Republican party and prompted an intervention from the Treasury. The Office of Foreign Assets Control (Ofac), which oversees US sanctions guidance and enforcement, has since said that buying shares with similar names to the 31 businesses named in Mr Trump’s executive order would be banned. But that too has created a problem for investors who must now judge how close the names of securities they own are to the list provided by the White House.

Scott Flicker, a partner at Paul Hastings, warned of a likely “whole additional category of securities floating out there that might have a similar name” to one on the executive order list. He said that left the investing public in “a nether land”.

Index providers including MSCI, FTSE Russell, S&P Dow Jones Indices and Nasdaq have said they plan to drop Chinese companies from their benchmarks. However, each has interpreted the guidance from Treasury differently. “It was a bit of a mess,” an executive at one of the providers said.

The London Stock Exchange removed two securities, American depositary receipts of China Mobile and China Unicom, from its global equity segment on Monday. That happened after the NYSE had delisted the companies, since the ADRs were backed by shares listed in New York.

NYSE’s backtrack threw the decision into doubt, prompting fresh discussions among LSE officials. But the securities are expected to remain off the LSE, following the NYSE’s second about-turn and on the expectation that the securities will be on the as-yet unpublished subsidies list.

Some brokers who process and settle trades have warned clients that they would be unable to transact any securities linked to the 31 groups, one emerging markets investor told the Financial Times, requesting anonymity for fear of retribution from regulators. Late on Wednesday, Ofac said financial intermediaries could facilitate trades if an investor was seeking to sell out of an affected Chinese group.

“People have a hard time understanding exactly where the lines are [and] what they can and cannot do,” said Maura Rezendes, a partner at Allen & Overy who previously worked at Ofac. “Even with the cover of [further guidance] or the US government saying we didn’t mean to prohibit those kinds of activities, you’ll just see people refuse to do it. That will cause gridlock in the market.”

Money managers said the mandate could prompt other Chinese companies to de-list from American exchanges. Since 2000, Chinese companies have raised more than $140bn through share sales on US shores, according to data provider Refinitiv. It is unclear whether president-elect Joe Biden will reverse the policies Mr Trump’s team has enacted in its final days in office.

Column chart of Proceeds from equity offerings by Chinese groups in the US, by year ($bn) showing Chinese companies have raised north of $140bn in the US since 2000

“This is a rivalry that is likely to be with us regardless of the change in the US administration,” said Morgan Harting, a portfolio manager at AllianceBernstein. “The specific policy choices or tactics will surely evolve . . . but I wouldn’t expect there to suddenly be much warmer relations.”

The executive order has already prompted mutual and exchange traded funds to cut stakes in Chinese groups and for investors to analyse what derivatives in their portfolio might prove problematic. US shares of China Mobile and China Telecom have fallen nearly 20 per cent since Mr Trump signed the order.

“You are essentially weaponising the financial markets,” Jack Janasiewicz, a portfolio manager at Natixis Investment Managers, warned.

Additional reporting by Hudson Lockett, Michael Mackenzie



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Copper hits record high with demand expected to rise sharply

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Copper prices hit a record high on Friday in the latest leg of a broad rally across commodity markets sparked by the reopening of major economies and booming demand for minerals needed for the green energy transition.

Copper, used in everything from electric vehicles to washing machines, rose as much as 1.2 per cent to $10,232 a tonne, surpassing its previous peak set in 2011 at the height of a previous commodities boom.

The price has more than doubled from its pandemic lows in March last year due to voracious demand from China, the biggest consumer of the metal, and also investors looking to bet on a big uptick in the global economy and protect their portfolios against potential for rising inflation.

Government stimulus packages and the shift towards electrification to meet the goals of the Paris agreement on climate change are expected to fuel further demand for the metal, which analysts and industry executives believe could hit $15,000 a tonne by 2025.

“Capacity utilisation rates of our customers are the highest in a decade and that’s before stimulus money both in Europe and the US has started to flow,” said Kostas Bintas, head of copper trading at Trafigura, one of the world’s biggest independent commodity traders. “That will be significant.”

The US and Europe were becoming significant factors in the consumption of copper for the first time in decades, he added. “Before, it’s effectively been a China-only story. That is changing fast.”

Concerns about the long-term supply of copper due to lack of investment by large miners has also pushed up prices. There are only a few large projects in a development, while most of the world’s easily produced copper has already been mined.

“The current pipeline of projects likely to start producing in the next few years represents only 2.3 per cent of forecast mine supply,” said Daniel Haynes, analyst at banking group ANZ. “This is well down on previous cycles, including 2010-13 when it reached 12 per cent.”

The upward march of other raw materials is showing no signs of abating. Steelmaking ingredient iron ore traded above $200 a tonne for the first time as China returned to work after the Labour Day holidays in early May. 

In spite of production cuts in Tangshan and Handan, two key steelmaking cities in China, analysts expect output to remain solid over the next couple of quarters. 

“Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise with steel supply being restricted,” said Erik Hedborg, a principal analyst at CRU Group.

“Iron ore producers are enjoying exceptionally high margins as around two-thirds of seaborne supply only require prices of $50 a tonne to break even.”

Elsewhere, tin on Thursday rose above $30,000 a tonne for the first time in a decade before easing. Tin is used to make solder — the substance that binds circuit boards and wiring — and is benefiting from strong demand from the electronics industry, which has been lifted by growing numbers of stay-at-home workers.

US wood prices continued to race higher ahead of the peak in the US homebuilding season in the summer with lumber futures rising to a record high above $1,600 per 1,000 board feet length, up from $330 this time last year.

Agricultural commodities also continued to rally as a result of a particularly dry season in Brazil, concerns about drought in the US and Chinese demand. Strong increases in food prices have started to affect global consumers. Corn rose to a more than eight-year high of $7.68 this week, while coffee has risen almost 10 per cent since the start of month, hitting a four-year high of $1.54 a pound this week.



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Wall Street stocks waver as investors await US jobs data

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Wall Street stock markets wavered, with tech losses dragging down some indices, but remained close to record highs ahead of US jobs data on Friday that could pile pressure on the Federal Reserve to rethink its ultra-supportive monetary policies.

The S&P 500 was up 0.2 per cent in the afternoon in New York, hovering slightly below its all-time high achieved late last month. The peak was reached following a long rally supported by the Fed and other central banks unleashing trillions of dollars into financial markets in pandemic emergency spending programmes.

The technology-heavy Nasdaq Composite, however, which is stacked with growth companies sensitive to changing interest rate expectations, was down 0.5 per cent by the afternoon in New York, the fifth straight losing session for the index.

The divergence of the two indices followed patterns from earlier this year, when investors sold out of growth companies over fears of rising rates and poured into more cyclical plays. That trade has been more muted recently but could be coming back, said Nick Frelinghuysen, a portfolio manager at Chilton Trust.

“It’s been a bit more ambiguous . . . in terms of what regime is leading this market higher, is it quality and growth or is it value and cyclicals?” Frelinghuysen said. “We’re in a little bit of a wait-and-see mode right now.”

The 10-year Treasury yield, which rose rapidly earlier this year amid inflation fears, declined 0.05 percentage points to 1.56 per cent on Thursday.

In Europe, the Stoxx 600 closed down 0.2 per cent, hovering just below its record high reached in mid-April.

With the US economy close to recovering losses incurred during coronavirus shutdowns, economists expect the US government to report on Friday that the nation’s employers created 1m new jobs in April. Investors will scrutinise the non-farm payrolls report for clues about possible next moves by the Fed, which has said it will continue with its $120bn a month of bond purchases until the labour market recovers.

Up to 1.5m jobs would “not be enough for the Fed to shift”, analysts at Standard Chartered said. “Between 1.5m and 2m, there is likely to be uncertainty on Fed perceptions.”

Central bankers worldwide had a strong “communications challenge” around the eventual withdrawal of emergency monetary support measures, said Roger Lee, head of UK equity strategy at Investec.

“If it is orderly, then you can expect a gentle continuation of this year’s stock market rotation” from lockdown beneficiaries such as technology shares into economically sensitive businesses such as oil producers and banks, Lee said. “If it is disorderly, it will be a case of ‘sell what you can’.”

On Thursday the Bank of England upgraded its growth forecasts for the UK economy but stopped short of following Canada in scaling back its asset purchases.

The BoE maintained the size of its quantitative easing programme at £895bn, while also keeping its main interest rate on hold at a record low of 0.1 per cent. The British central bank added that while its asset purchases “could now be slowed somewhat” after it became the dominant buyer of UK government debt last year, “this operational decision should not be interpreted as a change in the stance of monetary policy”.

Sterling slipped 0.1 per cent against the dollar to $1.389.

The dollar, as measured against a basket of trading partners’ currencies, weakened 0.4 per cent. The euro gained 0.4 per cent to $1.206.

Brent crude fell 1.1 per cent to $68.17 a barrel.



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Gensler raises concern about market influence of Citadel Securities

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Gary Gensler, new chair of the Securities and Exchange Commission, has expressed concern about the prominent role Citadel Securities and other big trading firms are playing in US equity markets, warning that “healthy competition” could be at risk.

In testimony released ahead of his appearance before the House financial services committee on Thursday, Gensler said he had directed his staff to look into whether policies were needed to deal with the small number of market makers that are taking a growing share of retail trading volume.

“One firm, Citadel Securities, has publicly stated that it executes about 47 per cent of all retail volume. In January, two firms executed more volume than all but one exchange, Nasdaq,” Gensler said.

“History and economics tell us that when markets are concentrated, those firms with the greatest market share tend to have the ability to profit from that concentration,” he said. “Market concentration can also lead to fragility, deter healthy competition, and limit innovation.”

Gensler is scheduled to appear at the third hearing into the explosive trading in GameStop and other so-called meme stocks in January.

Trading volumes in the US surged that month as retail investors flocked into markets, prompting brokers such as Robinhood to introduce trading restrictions that angered investors and drew the attention of lawmakers.

The market activity galvanised policymakers in Washington and investors. Lawmakers have focused much of their attention on “payment for order flow”, in which brokers such as Robinhood are paid to route orders to market makers like Citadel Securities and Virtu.

That practice has been a boon for brokers. It generated nearly $1bn for Robinhood, Charles Schwab and ETrade in the first quarter, according to Piper Sandler.

Gensler noted that other countries, including the UK and Canada, do not allow payment for order flow.

“Higher volumes of trades generate more payments for order flow,” he said. “This brings to mind a number of questions: do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?”

Gensler also said he had directed his staff to consider recommendations for greater disclosure on total return swaps, the derivatives used by the family office Archegos. The vehicle, run by the trader Bill Hwang, collapsed in March after several concentrated bets moved against the group, and banks have sustained more than $10bn of losses as a result.

Market watchdogs have expressed concerns that regulators had little or no view of the huge trades being made by Archegos.

“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds,” Gensler said.

“Issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail.”



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