The shifting winds of global politics
09 July 2024
In a year that will see around half the world鈥檚 population take part in an election, Karl Loomes looks at the potential impact on securities lending and the financial markets
Image: stock.adobe/Vitezslav Vylicil
Politics and finance have long gone hand-in-hand. From a general sentiment of good economic policy, to specific manifesto pledges set to help or hurt a certain sector, the market often waits with bated breath to discover the choice of the electorate.
It is no surprise then, that in this year where around half of the global population is set to take part in some form of election, market participants have a lot to keep an eye on.
Top trumps
While it is true around 64 countries are holding elections this year, those in the US are arguably dominating both headlines, and the thoughts of the market. A natural enough situation given the country鈥檚 broad and deep global economic impact. The personification of party politics in the one-person figurehead that is (or will become) President 鈥 particularly if that person is divisive 鈥 makes it all the easier to distil the complexities of financial policy into a 鈥楤iden vs Trump鈥 debate.
Most polls are fairly unanimous in the expected presidential result at the moment, however, and so the markets have no doubt already priced in any believed impacts of a second Trump White House.
One interesting point of note given how diametrically opposed the two candidates are, is an area of economic policy that many believe they may share 鈥 protectionism. A view aired by a number of speakers during the various panel discussions at the recent International Securities Lending Association (ISLA) conference in Geneva.
For Biden, this natural Democratic policy of protecting domestic industry, and more importantly workforce, fits well in an election year. For Trump, the US-first, 鈥淢ake America Great Again鈥 attitude, seems less fiscal and more political, and very much fitting with the beliefs and policies of his first term.
While broad economic policy often plays a role in elections, what is rarer is to see the intricacies of securities finance regulation making headlines. This is currently the case, however, with Basel Endgame regulations. The nuances of capital liquidity requirements have been on billboards and TV ads in the US for a while 鈥 even making it onto a highly coveted Super Bowl spot in February this year.
Of course 鈥榥uances鈥 is not quite correct. The argument against is generally summed up as 鈥 the proposed increased capital requirements will make it harder for banks to help 鈥榥ormal people鈥. The argument for: if they hold large amounts of capital, taxpayers will not be put in the situation of the 2008 financial crisis, where governments were forced to financially support banks that were 鈥榯oo big to fail鈥.
As the Bank Policy Institute (BPI) puts it: 鈥淭he federal government鈥檚 Basel Endgame proposal will have real costs for everyday Americans. These capital requirements will create a drag on our economy for years to come 鈥 and will hurt working families and small businesses.鈥
The majority of the anti-Basel campaign is industry led, though the general consensus is that it falls mostly down party lines (Democrats for, Republicans against). The exception being 鈥 as often the case in the umbrella parties of US politics 鈥 the more right-leaning, free market side of the Democratic party, who have at least murmured their disagreement.
Interestingly, a study by law firm Latham & Watkins noted that of the 356 publicly posted comment letters on the regulation, 97 per cent either outright opposed the proposal, or raised concerns regarding at least one substantial element of it. The report also found that about 86 per cent of these negative comments were actually from outside the banking sector 鈥 including elected officials, think tanks, as well as various business segments.
Voting with your wallet
Though the term generally means voting in accordance with what will benefit you financially, 鈥榲oting with your wallet鈥 could be seen in a different light in the US at the moment. Arguably, demand for Trump Media & Technology Group shares is coming from the retail side 鈥 specifically from those 鈥榓verage鈥 investors who support Donald Trump politically.
This can be seen both as a political statement 鈥榖y other means鈥, or as some vague reflection that if the head of a company is President of the United States, one way or another that firm may benefit during their term. Who can say if this is a legitimate argument, but certainly it could be a self-fulfilling prophecy if investors buy shares believing it to be true.
This 鈥榩ersonality investing鈥 is not just limited to the US market. It perhaps goes a long way to the testament of Trump鈥檚 image and global media presence, that shares in the Chinese company Wisesoft 鈥 whose Mandarin name, Chuan Da Zhe Sheng, sounds like 鈥楾rump wins big鈥 in the local language 鈥 jumped 10 per cent following the Presidential debate.
Donald Trump recently came out and publicly explained to the company鈥檚 investors how not to allow the shares they hold to be lent out, in order to minimise short selling in the stock. Again, the intricacies of securities lending rarely hit the mainstream media, though public sentiment against short selling activity has certainly been in the press many times (particularly following the credit crunch and 2008 financial crisis).
Trump鈥檚 concerns may not be without merit 鈥 at least in terms of the shares seeing a lot of short selling activity 鈥 though artificially inflating a price by not allowing this educated, expert aspect of the market to 鈥榟ave their say鈥 seems unlikely to work as a long-term strategy.
Data from S&P Global Intelligence shows that in Q2 this year, Trump Media & Technology Group shares generated the highest levels of securities lending revenue for US equities, some US$108.1 million.
That said, borrowing has declined in recent days compared to its higher levels. According to Mathew Chessum, director of securities finance at S&P Global Market Intelligence, the percentage of market cap on loan was about 4.49 per cent at the start of July, compared to levels nearer 14 per cent where it has been in the past.
He does note that 鈥渢here was a small uplift in borrowing activity when the conviction was announced and the share price fell by seven per cent at the start of the month鈥, perhaps suggesting that short sellers are also keeping one eye on the political landscape.
round the world
Of course as headline-grabbing as US politics is, there are multiple facets of both politics, and securities finance, elsewhere in the world.
European elections have been seeing a political shift to the right, as populist candidates oust incumbents at every turn. One notable aspect of this, is that a shift to the right generally brings with it a move away from environmental spending (traditionally less of a priority for the right), and an increase in money funnelled into defence. With this sea change in a government鈥檚 priorities, naturally related shares for either sector will be impacted accordingly.
As Chessum notes: 鈥淎s the Greens have won fewer seats in the European Parliament, the political emphasis seems to be moving from the environment to defence spending. We may therefore see higher levels of short interest in these environmental stocks as political and financial incentives are diluted.鈥
Following the first round of elections in France, the centre left parties grouped together to pull candidates that were in third place, in a collective effort to keep Marine Le Pen鈥檚 right wing Rassemblement National (RN) party out of power. The equity markets, at least, seemed to have taken the move well, with the CAC 40 seeing a bump after the first round.
Sharon Bentley-Hamlyn, investment manager at Aubrey Capital Management, comments: 鈥淢arkets are hoping to avoid either the RN or the extreme left gaining too much influence since both are seen as having the potential to keep deficits, already 5.5 per cent of GDP in 2023, well above the EU鈥檚 three per cent limit.
鈥淭he left is set on higher spending and taxation, while the RN talks about reducing the tax burden, increasing defence spending and nationalising the motorways.鈥
This seems, in the main, to be the preference of the market to avoid any extremes 鈥 both on the right and left 鈥 rather than relating to any specific economic policies.
This sentiment for the middleground is already being played out elsewhere in the world. The South African elections resulted in a coalition government, as the African National Congress (ANC) party lost its majority for the first time since the end of apartheid.
The ANC still has a large percentage of seats however, which could be key. Speaking at a panel discussion hosted by our sister publication Asset Servicing Times before the SA election, Sifiso Ndala, head of global securities solutions at Rand Merchant Bank, noted:
鈥淲ith a coalition government, from a business perspective, there is hope that the governing body would get at least between 43 and 47 per cent, which means that they will still have a large majority. As a result, there will be some consistency in the policies 鈥 especially the financial policies that have been put in place.鈥
Similarly the Indian elections have also resulted in a coalition government, which the country's equity, bond and FX markets are all seemingly positive about.
According to Rob Brewis, investment manager at Aubrey Capital Management: 鈥淭he markets themselves have all been pretty stable, the rupee and the bond market, which itself is probably gaining from index inclusion coming up at the end of this month, and the equity market seems to have moved a fair bit higher now and is gaining some momentum.鈥
Monetary, not fiscal
Of course while all these global elections are in focus for the markets, high interest rates are the backdrop for everything 鈥 the securities lending and repo markets included. With the key central banks setting policy independently from their country鈥檚 elected officials, who can say how much influence one person can have? We should vote on it.
It is no surprise then, that in this year where around half of the global population is set to take part in some form of election, market participants have a lot to keep an eye on.
Top trumps
While it is true around 64 countries are holding elections this year, those in the US are arguably dominating both headlines, and the thoughts of the market. A natural enough situation given the country鈥檚 broad and deep global economic impact. The personification of party politics in the one-person figurehead that is (or will become) President 鈥 particularly if that person is divisive 鈥 makes it all the easier to distil the complexities of financial policy into a 鈥楤iden vs Trump鈥 debate.
Most polls are fairly unanimous in the expected presidential result at the moment, however, and so the markets have no doubt already priced in any believed impacts of a second Trump White House.
One interesting point of note given how diametrically opposed the two candidates are, is an area of economic policy that many believe they may share 鈥 protectionism. A view aired by a number of speakers during the various panel discussions at the recent International Securities Lending Association (ISLA) conference in Geneva.
For Biden, this natural Democratic policy of protecting domestic industry, and more importantly workforce, fits well in an election year. For Trump, the US-first, 鈥淢ake America Great Again鈥 attitude, seems less fiscal and more political, and very much fitting with the beliefs and policies of his first term.
While broad economic policy often plays a role in elections, what is rarer is to see the intricacies of securities finance regulation making headlines. This is currently the case, however, with Basel Endgame regulations. The nuances of capital liquidity requirements have been on billboards and TV ads in the US for a while 鈥 even making it onto a highly coveted Super Bowl spot in February this year.
Of course 鈥榥uances鈥 is not quite correct. The argument against is generally summed up as 鈥 the proposed increased capital requirements will make it harder for banks to help 鈥榥ormal people鈥. The argument for: if they hold large amounts of capital, taxpayers will not be put in the situation of the 2008 financial crisis, where governments were forced to financially support banks that were 鈥榯oo big to fail鈥.
As the Bank Policy Institute (BPI) puts it: 鈥淭he federal government鈥檚 Basel Endgame proposal will have real costs for everyday Americans. These capital requirements will create a drag on our economy for years to come 鈥 and will hurt working families and small businesses.鈥
The majority of the anti-Basel campaign is industry led, though the general consensus is that it falls mostly down party lines (Democrats for, Republicans against). The exception being 鈥 as often the case in the umbrella parties of US politics 鈥 the more right-leaning, free market side of the Democratic party, who have at least murmured their disagreement.
Interestingly, a study by law firm Latham & Watkins noted that of the 356 publicly posted comment letters on the regulation, 97 per cent either outright opposed the proposal, or raised concerns regarding at least one substantial element of it. The report also found that about 86 per cent of these negative comments were actually from outside the banking sector 鈥 including elected officials, think tanks, as well as various business segments.
Voting with your wallet
Though the term generally means voting in accordance with what will benefit you financially, 鈥榲oting with your wallet鈥 could be seen in a different light in the US at the moment. Arguably, demand for Trump Media & Technology Group shares is coming from the retail side 鈥 specifically from those 鈥榓verage鈥 investors who support Donald Trump politically.
This can be seen both as a political statement 鈥榖y other means鈥, or as some vague reflection that if the head of a company is President of the United States, one way or another that firm may benefit during their term. Who can say if this is a legitimate argument, but certainly it could be a self-fulfilling prophecy if investors buy shares believing it to be true.
This 鈥榩ersonality investing鈥 is not just limited to the US market. It perhaps goes a long way to the testament of Trump鈥檚 image and global media presence, that shares in the Chinese company Wisesoft 鈥 whose Mandarin name, Chuan Da Zhe Sheng, sounds like 鈥楾rump wins big鈥 in the local language 鈥 jumped 10 per cent following the Presidential debate.
Donald Trump recently came out and publicly explained to the company鈥檚 investors how not to allow the shares they hold to be lent out, in order to minimise short selling in the stock. Again, the intricacies of securities lending rarely hit the mainstream media, though public sentiment against short selling activity has certainly been in the press many times (particularly following the credit crunch and 2008 financial crisis).
Trump鈥檚 concerns may not be without merit 鈥 at least in terms of the shares seeing a lot of short selling activity 鈥 though artificially inflating a price by not allowing this educated, expert aspect of the market to 鈥榟ave their say鈥 seems unlikely to work as a long-term strategy.
Data from S&P Global Intelligence shows that in Q2 this year, Trump Media & Technology Group shares generated the highest levels of securities lending revenue for US equities, some US$108.1 million.
That said, borrowing has declined in recent days compared to its higher levels. According to Mathew Chessum, director of securities finance at S&P Global Market Intelligence, the percentage of market cap on loan was about 4.49 per cent at the start of July, compared to levels nearer 14 per cent where it has been in the past.
He does note that 鈥渢here was a small uplift in borrowing activity when the conviction was announced and the share price fell by seven per cent at the start of the month鈥, perhaps suggesting that short sellers are also keeping one eye on the political landscape.
round the world
Of course as headline-grabbing as US politics is, there are multiple facets of both politics, and securities finance, elsewhere in the world.
European elections have been seeing a political shift to the right, as populist candidates oust incumbents at every turn. One notable aspect of this, is that a shift to the right generally brings with it a move away from environmental spending (traditionally less of a priority for the right), and an increase in money funnelled into defence. With this sea change in a government鈥檚 priorities, naturally related shares for either sector will be impacted accordingly.
As Chessum notes: 鈥淎s the Greens have won fewer seats in the European Parliament, the political emphasis seems to be moving from the environment to defence spending. We may therefore see higher levels of short interest in these environmental stocks as political and financial incentives are diluted.鈥
Following the first round of elections in France, the centre left parties grouped together to pull candidates that were in third place, in a collective effort to keep Marine Le Pen鈥檚 right wing Rassemblement National (RN) party out of power. The equity markets, at least, seemed to have taken the move well, with the CAC 40 seeing a bump after the first round.
Sharon Bentley-Hamlyn, investment manager at Aubrey Capital Management, comments: 鈥淢arkets are hoping to avoid either the RN or the extreme left gaining too much influence since both are seen as having the potential to keep deficits, already 5.5 per cent of GDP in 2023, well above the EU鈥檚 three per cent limit.
鈥淭he left is set on higher spending and taxation, while the RN talks about reducing the tax burden, increasing defence spending and nationalising the motorways.鈥
This seems, in the main, to be the preference of the market to avoid any extremes 鈥 both on the right and left 鈥 rather than relating to any specific economic policies.
This sentiment for the middleground is already being played out elsewhere in the world. The South African elections resulted in a coalition government, as the African National Congress (ANC) party lost its majority for the first time since the end of apartheid.
The ANC still has a large percentage of seats however, which could be key. Speaking at a panel discussion hosted by our sister publication Asset Servicing Times before the SA election, Sifiso Ndala, head of global securities solutions at Rand Merchant Bank, noted:
鈥淲ith a coalition government, from a business perspective, there is hope that the governing body would get at least between 43 and 47 per cent, which means that they will still have a large majority. As a result, there will be some consistency in the policies 鈥 especially the financial policies that have been put in place.鈥
Similarly the Indian elections have also resulted in a coalition government, which the country's equity, bond and FX markets are all seemingly positive about.
According to Rob Brewis, investment manager at Aubrey Capital Management: 鈥淭he markets themselves have all been pretty stable, the rupee and the bond market, which itself is probably gaining from index inclusion coming up at the end of this month, and the equity market seems to have moved a fair bit higher now and is gaining some momentum.鈥
Monetary, not fiscal
Of course while all these global elections are in focus for the markets, high interest rates are the backdrop for everything 鈥 the securities lending and repo markets included. With the key central banks setting policy independently from their country鈥檚 elected officials, who can say how much influence one person can have? We should vote on it.
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