Fed Rate Cut Delay Widens US and Major Countries' Rate Gap
French, UK, US Elections and US-EU Tariffs on China Also Impact
The biggest risk factors identified by corporate Chief Financial Officers (CFOs) for the second half of this year were interest rates, elections, and tariffs, according to a Bloomberg report on the 30th of last month (local time).
The primary concern for many CFOs is the prospect of interest rate cuts by the U.S. Federal Reserve (Fed). While the Fed waits for inflation to fall to 2%, countries such as Europe, Canada, and Brazil have proactively lowered their interest rates. In contrast, Japan has ended its negative interest rate policy and is gradually raising rates.
The interest rate differentials caused by each country's monetary policies are affecting capital flows and currencies. Although the delay in Fed rate cuts has benefited the dollar, the Japanese yen remains significantly weak despite the rate hikes. Steven Ma, CFO of Nissan, stated, "We produce as much as possible in Japan and ship globally centered on the U.S., but we try to avoid holding cash in Japan as much as possible," adding, "The dollar is so strong that when converted to yen, it results in substantial gains."
Elections in France, the UK, and the U.S. are also factors that could bring significant changes. Bloomberg noted that if left-wing or right-wing populist parties secure a large number of votes in France, greater market turmoil is expected. On that day, the far-right National Rally (RN) was predicted to take the lead in the first round of the French parliamentary elections.
In trade, recent tariff increases by the U.S. and Europe on Chinese products have heightened global trade tensions. Former U.S. President Trump had announced plans to raise tariffs on China to over 60%. If Trump succeeds in returning to the White House, U.S.-China trade conflicts could intensify. Bloomberg assessed that this has already complicated matters for multinational corporations. Roland Sackers, CFO of Quiagen, said, "The tariff debate has become a global issue that could hinder innovation," adding, "All companies are ready to fight for a global market economy and open borders."
Additionally, Bloomberg anticipated that geopolitical tensions in Ukraine and the Middle East will also be important factors. Andrea Gerzoni, Global Vice Chairman of the global accounting firm Ernst & Young (EY), stated, "The number of allied countries that we can be completely confident in is decreasing," and noted, "Especially for multinational companies, the range of choices will narrow." She further added that transactions involving multiple countries will become even more difficult to complete due to the rise of protectionism.
These concerns are already influencing CFO decision-making worldwide. Capital expenditures by large U.S. companies in the first quarter amounted to about $250 billion, including the adoption of new technologies such as artificial intelligence (AI), representing an approximately 6% increase compared to the same period last year. However, Bloomberg pointed out that this spending is concentrated among a few companies. More than half of S&P 500 companies spent less on capital expenditures than on depreciation and amortization over the past year. Bloomberg explained that this indicates companies are taking a cautious stance on future investments. Amol Dargalkar, Chairman of Chatham Financial, said, "Most CFOs manage these risks by postponing decisions until certainty is secured."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
