May 21, 2018
United States:
U.S. Puts ‘Trade War’ Against China on Hold, Mnuchin Says
The Trump administration won’t impose tariffs on Chinese products for now, after the two nations made progress on trade issues during two days of talks, Treasury Secretary Steven Mnuchin said. “We’re putting the trade war on hold. So right now, we have agreed to put the tariffs on hold while we try to execute the framework,” Mnuchin said on “Fox News Sunday.” President Donald Trump has threatened to impose tariffs on as much as $150 billion in Chinese imports to punish Beijing for allegedly violating American intellectual property and unfair trade practices. China vowed to retaliate with tariffs on everything from soybeans to airplanes. Mnuchin’s remarks will be a relief to investors, who had feared the world’s two biggest economies were on the brink of an all-out trade conflict. The International Monetary Fund has warned that a global trade war would undermine the broadest global upswing in years. Asian stocks were set to start the week higher and S&P 500 contracts gained 0.7 percent, an unusually large gain for early Asian trading. Even so, Mnuchin said Trump “can always decide to put the tariffs back on if China doesn’t go through with their commitments.” Other members of the administration said duties are still an option if needed to get China to chance its practices. “As this process continues, the United States may use all of its legal tools to protect our technology through tariffs, investment restrictions and export regulations,” U.S. Trade Representative Robert Lighthizer said in a statement. “Real structural change is necessary. Nothing less than the future of tens of millions of American jobs is at stake.”
Biggest Worry About U.S. Yield Climb May Be Lack of Trigger
As long as interest rates are climbing because the U.S. economy is in good health, then it just amounts to “normalization,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon reassured this month in advising investors to prepare for 4 percent 10-year Treasury yields. But what if it’s not not entirely clear why yields are rising? That’s the query posed by Torsten Slok at Deutsche Bank AG after sudden swings in 10-year notes last week. By the end of the day Thursday, yields had surged 16 basis points for the week, without any obvious trigger — such as a weak government-debt auction or a worryingly high inflation reading, according to Slok. Then Friday, yields tumbled the most in six weeks. “Nobody understands what sent 10s on a huge roller-coaster ride,” Slok, the bank’s chief international economist, wrote in a note to clients sent May 19. (He found unconvincing the theory that remarks about European monetary-policy plans by the French central bank chief had fed through to Treasuries.) “If the market doesn’t have a narrative, then it means that the market doesn’t know what the implications are.” Underlying the mid-week advance in yields could be “simmering fears,” Slok said. Among them: a widening U.S. fiscal deficit, diminished foreign-investor demand for Treasuries on higher hedging costs and concerns that American growth is exceeding its speed limit — leading to faster inflation. It all escalates the importance of monitoring Treasuries. “In most of my client conversations investors agree that long rates gapping higher is the biggest risk to this expansion,” Slok said. Ten-year yields hit the highest since 2011 Friday, at 3.1261 percent.
Europe:
Italy’s Bond Slump Stirs Fading Memory of Euro-Area Debt Crisis
Investors could be forgiven for getting flashbacks to Europe’s debt crisis. Italian yields surged to a seven-month high Wednesday on news that a putative anti-establishment government has discussed a 250 billion-euro ($295 billion) debt write-off from the European Central Bank. The bond rout in the euro-area’s third largest economy spilled over across the region’s markets — including those of Greece — and pushed the euro to this year’s lowest level. For some, the volatility removed the veil of security that has seen money pour into peripheral euro-area bond markets in recent months amid signs of improving growth, fading political risks and the ECB’s unprecedented stimulus package. Even though an official from Italy’s League party denied plans for a write-down, talk of debt forgiveness is hurting confidence in a market already concerned about discussions over Greece’s bailout exit. “This is a market rapidly losing faith in the stories they were telling themselves,” said James Athey, a money manager at Aberdeen Standard Investments, which manages 648.5 billion euros in assets. “Given the incredible lack of structural reform, euro-area debt issues were never that far from the surface.” European markets have been remarkably resilient to political risks over the past year, including elections in France and Germany, as well as a Catalan secessionist push in Spain. But the political flare-up in Italy comes at a time when the ECB is looking to extricate itself from its bond-buying program and take the first steps toward normalizing interest rates, even as the region’s economic recovery shows signs of faltering. On Wednesday, German Chancellor Angela Merkel said governments must step up efforts to integrate the region, because the ECB’s backstop won’t last forever. Aberdeen’s Athey sees Italy’s 10-year yield spread over Germany potentially ballooning to 200 basis points for the first time since June last year, from around 150 basis points now.
Asia:
China Will ‘Significantly’ Boost U.S. Purchases. By How Much is the Question
China will “significantly increase purchases” of U.S. goods, the White House said as Beijing’s special envoy at talks in Washington declared a trade war has been averted between the world’s two largest economies. A joint statement released by the White House following the talks didn’t place a dollar figure on the increased purchases by China, or address a comment by President Donald Trump’s top economic adviser suggesting Beijing had agreed to slash its annual trade surplus with the U.S. by $200 billion. Vice Premier Liu He, a special envoy of China’s President Xi Jinping, told reporters in Washington that talks with Treasury Secretary Steven Mnuchin, Secretary of Commerce Wilbur Ross and U.S. Trade Representative Robert Lighthizer ended with a pledge not to engage in a trade war, according to a Xinhua news agency report. Liu said both sides agreed to stop “slapping tariffs” on each other and called his visit “positive, pragm atic, constructive and productive,” Xinhua reported. Cooperation will be enhanced in such areas as energy, agriculture, health care, high-tech products and finance, a “win-win” choice for both nations. The statement said China agreed to “meaningful increases in U.S. agriculture and energy exports” with details to be worked out later. While there’s still a long way to go in terms of specifics, the announcement that that a trade war will be averted should boost global stocks Monday, according to Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney. “Investors had been fretting,” Oliver said. “U.S. energy, agriculture, manufacturing and services companies with significant exposure to exports to China will be key beneficiaries. But it’s also a big positive across Asia given supply chain linkages to Chinese companies that ultimately export to the U.S.”
Asian Stocks Advance as U.S. and China Put Trade War `on Hold’
Asian stocks outside Japan climbed, tracking gains in U.S. equity futures, after American and Chinese officials signaled a de-escalation of recent trade tension. The MSCI Asia Pacific Index ex-Japan rose 0.1 percent to 567.63 as of 3:13 p.m. in Hong Kong, in a broad regional rally. Japan’s Topix index failed to hold on to early gains and fell 0.1 percent at the close. Meanwhile, the Nikkei 225 Stock Average rose for a third day. Futures contracts on the S&P 500 Index climbed 0.5 percent after U.S. Treasury Secretary Steven Mnuchin said the U.S. was “putting the trade war on hold” following bilateral talks in Washington. Beijing promised to “significantly” increase purchases of U.S. goods and services, although no dollar figure was specified. Although some of the more fundamental differences are “largely left unaddressed, trade tensions are buried for now,” Klaus Baader, global chief economist at Societe Generale SA, wrote in a report. “Good news for all.”