The Week in Breakingviews: After the deluge
BREAKINGVIEWS-The Week in Breakingviews: After the deluge The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Peter Thal Larsen
LONDON, Nov 7 (Reuters Breakingviews) - Welcome back! It’s fashionable to talk about the waning influence of the United States. Yet this week investors, executives, and government ministers around the world were laser-focused on Senate races in places like Michigan, Texas, and Ohio. Some thoughts on Donald Trump’s midterm meltdown below. Tell me what you think. (If this newsletter was forwarded to you, sign up here to get it in your inbox every weekend.)
OPENING LINE
“Do you feel lucky, punk? For foreign firms with takeover deals running through China, the answer is, increasingly and emphatically, no.”
Read more: SoftBank deal flags China’s M&A hair trigger
FIVE THINGS I LEARNED FROM BREAKINGVIEWS THIS WEEK
Morgan Stanley’s MS.N return on a hypothetical takeover of UBS UBSG.S could be a measly 13%. (Swiss bank needs escape options)
The market capitalisation of cryptocurrencies in circulation fell just 2% after Binance was hacked. (Holders are remarkably trusting)
Syngenta is aiming to go public at a multiple of up to 23 times this year’s EBITDA. (Rivals trade on single digits)
Most gamers’ playing time is spent on titles six or more years old. (Bodes well for “Grand Theft Auto VI”)
The founder of security firm ADT also invented the stock ticker. (Apollo awaits a return)
WAVE GOODBYE
Few elections truly change history. What initially looks like a seminal vote is often a manifestation of a longer-term shift, or a swing which is quickly reversed. There are exceptions: American history would probably look very different had Al Gore occupied the Oval Office instead of George W. Bush. Most of the time, though, sweeping conclusions made on election night prove wide of the mark.
Which brings us, inevitably, to this week’s US midterm elections. The rejection of President Donald Trump’s Republican Party was emphatic. So was the condemnation of artificial intelligence data centres. As Karen Kwok pointed out, states representing 41% of planned US server farm capacity chose governors who have promised to pause construction. The rebuff contributed to a stock market selloff which wiped roughly $2 trillion off the tech-heavy Nasdaq Composite Index on Thursday.
Yet the data centre backlash was underway before Tuesday’s vote. Construction was already constrained or delayed by electricity shortages, planning constraints, and rising financing costs. (See Data dreams delayed.) Tech investors had similarly been bracing for a correction. (See For whom the bell rings.) “Why share prices fell is anyone’s guess,” Rob Cyran wrote.
Predicting what happens next is equally tricky. Big companies may use the last two years of Trump’s second term to rush through deals which would face greater scrutiny from a future trust-busting administration. As Jeffrey Goldfarb observed, the last commander-in-chief to lose control of both houses of Congress was George W. Bush in 2006: mergers surged 32% in the following year. However, Trump’s relaxed approach to policing potential monopolies has already spurred an M&A boom. And big corporate combinations will still face scrutiny from authorities in other countries, especially China.
One near-certainty is that Democrats in Congress will spend a lot of time investigating dodgy dealings by Trump and his cronies. The president and his family will face scrutiny, as will the companies which donated to his White House ballroom and other vanity projects. Elon Musk is another high-profile target, which helps explain why shares in SpaceX SPCX.O and Tesla TSLA.O, the trillion-dollar companies he hopes to combine, respectively fell 13% and 14% in the two days after the vote.
Other congressional achievements may be limited, though. Trump has promised to be “Mr. Veto” when presented with bills passed by the legislature. Investors in US government bonds must brace for another showdown over the debt ceiling at some point in 2027.
Finally, there is the rest of the world. The president who bypassed Congress to start a war with Iran is bound to resist domestic restrictions on his handling of international affairs. Oil markets appear to have concluded that some kind of peace deal in the Middle East is now more likely, yet an escalation is just as possible. As Gabriel Rubin noted, Trump still controls the trade and military decisions that have made him and his party so unpopular at home. Until the next election.
CHART OF THE WEEK
Most investors were understandably focused on the selloff in US stocks. Yet Chinese equities have been sliding since they peaked in June, dragging the country’s benchmark CSI 300 Index into the red for the year. Now Beijing is turning emergency market rescue tools into permanent facilities. What’s missing is a recovery in corporate earnings, argues Ka Sing Chan.
THE WEEK IN PODCASTS
When the European Union and China last month struck a surprising truce over imports of hybrid vehicles from the People’s Republic, many wondered what it meant for trade relations between the two blocs. On The Big View, I talked to Sam Lowe of Flint Global about the outbreak of what he calls “strategic reasonableness” and whether it will last.
Over in the Viewsroom, Gabriel Rubin joined Aimee Donnellan and Jonathan Guilford to share his overnight analysis of the US midterm elections, and the consequences for markets, the artificial intelligence boom, and oil prices.
PARTING SHOT
Wall Street financiers do not often admit to being clueless. Yet confusion was the dominant state among top executives of banks and investment firms as they debated the future of artificial intelligence in Hong Kong this week. Goldman Sachs boss David Solomon told a summit convened by the Hong Kong Monetary Authority that nobody knows how the industry will play out in the long term. Jim Coulter, founding partner of private equity firm TPG, said the three most important words were “I don’t know”. For Una Galani, the candour in the room was almost refreshing.
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(Editing by Jonathan Guilford; Production by Oliver Taslic)
((For previous columns by the author, Reuters customers can click on LARSEN/peter.thal.larsen@thomsonreuters.com))