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Rabobank: “We’re Toast”

Rabobank: “We’re Toast”

I have made this reference before, but looking at euphoric markets I am again reminded of comedian Caroline Aherne as fake TV chat-show host Mrs Merton asking glamorous blonde Debbie McGee of her very short, plain, hair-piece wearing husband: “So what attracted you to the millionaire Paul Daniels?” 

Indeed, So what attracted you to central-bank-liquidity-driven markets? Because where would very short, plain, wig-wearing assets be without the Fed throwing in hundreds of billions in repo operations and NOT-QE, and China going down the same old unsustainable debt path to juice GDP for 2-3 quarters? Feeling pretty unloved, one would guess – and probably very shorted. Yet having studiously failed to learn that this extra-liquidity doesn’t drive sustainable recoveries, or prevent socio-economic unrest–in fact it drives it–we are set for a whole lot more from central banks, no doubt.

Of course, the phase one trade deal, which virtually nobody sees as realistic or sustainable, also continues to drive market sentiment. Yet CNY is still only around the 7 level, underlining what I have said about the risk/reward being mostly to the downside from here. Presumably, however, when the trade deal does break down, which could be even sooner than many expect, more central-bank liquidity will be required. So let’s celebrate that in advance too, why not?

The afterglow of the UK election also seems to be encouraging markets. And on that front we see that fiscal stimulus is going to pick up, the right kind of liquidity for once, and in the north and midlands for once too, which is set to become BoJo’s mojo dojo as he hopes to release animal spirits in left-behind locations. However, Johnson is also going to amend the UK Brexit legislation such that December 2020 is a hard exit date with no extension of the looming post-Brexit transition period possible.

…click on the above link to read the rest of the article…

Trade Wars Just Getting Started

Trade Wars Just Getting Started

Trade Wars Just Getting Started

Markets are eagerly awaiting the conclusion of the so-called “phase one” trade deal between the U.S. and China.

Both parties are trying to reach a mini-deal involving simple tariff reductions and a truce on new tariffs along with Chinese purchases of pork and soybeans from the U.S.

The likely success or failure of the mini-deal has been a main driver of stock market action for the past year. When the deal looks likely, markets rally. When the deal looks shaky, markets fall.

A deal is still possible. But investors should be prepared for a shocking fall in stock market valuations if it does not. Markets have fully discounted a successful phase one, so there’s not much upside if it happens.

On the other hand, if phase one falls apart stock markets will hit an air pocket and fall 5% or more in a matter of days.

But even if the phase one deal goes through, it does not end the trade wars. Unresolved issues include tariffs, subsidies, theft of intellectual property, forced transfer of technology, closed markets, unfair competition, cyber-espionage and more.

Most of the issues will not be resolved quickly, if ever.

Resolution involves intrusion into internal Chinese affairs both in the form of legal changes and enforcement mechanisms to ensure China lives up to its commitments.

These legal and enforcement mechanisms are needed because China has lied about and reneged on its trade commitments for the past 25 years. There’s no reason to believe China will be any more honest this time around without verification and enforcement. But China refuses to allow this kind of intrusion into their sovereignty.

For the Chinese, the U.S. approach recalls the Opium Wars (1839–1860) and the “Unequal Treaty” (1848–1950) whereby foreign powers (the U.K., the U.S., Japan, France, Germany and Russia) forced China into humiliating concessions of land, port access, tariffs and extraterritorial immunity.

…click on the above link to read the rest of the article…

The Phantom Mania

The Phantom Mania

There’s nothing of substance underlying the current market melt-up

Well, stocks are back at all-time highs. Ignited by the Fed’s “Not-QE” program and endless Trump administration teases of an “imminent” China deal, the S&P 500 has been propelled above its upward Bollinger band — a hyperextension only seen one other time since 2007:

Every week since Not-QE was announced has seen the S&P close green (this week finally ending the streak, barely). We’re officially in a melt-up, where both good news and bad news are accepted as valid reasons to push stocks even higher.

But what’s notable about this melt-up is that it’s missing a compelling narrative. Every past asset price mania required a feel-good mantra that convinced the masses “This time is different!”.

The South Sea bubble promised access to the untapped riches of the vast Asian sub-continent. Dotcom companies were going to unlock tremendous value previously trapped by the inefficiency of the old analog way of doing business. In 2017, Bitcoin looked like it just might replace fiat currencies overnight.

During the price melt-ups accompanying each of these manias, the public fell for the siren song of a radically better future, available RIGHT NOW if you just jump on the party train before it’s too late.

But today? What’s the radically better future being promised? Where’s the party train headed to?

A Parade Of Horribles

As best I can tell, it seems the rationale (I’m using that term very generously) for the current market melt-up is that:

  1. The Fed is backstopping the market again
  2. A trade deal with China is going to happen, likely soon

Let’s dig into each of these. But before we do, let’s be clear that neither of these promises a “radically better” future.

The Fed, and its central bank brethren around the globe, have been backstopping the market for the past decade. There’s really nothing new in that.

…click on the above link to read the rest of the article…

World Trade Barometer Suggests Global Economy Continues To Plunge As Trade War Takes Toll

World Trade Barometer Suggests Global Economy Continues To Plunge As Trade War Takes Toll

The World Trade Organization (WTO) published a new report Monday that warns global merchandise trade in goods will plunge through this quarter amid no resolution to the trade war, along with the continuation of a worldwide synchronized slowdown that shows no signs of abating in the near term. 

The Geneva-based intergovernmental organization’s leading-indicator called the Goods Trade Barometer printed at 96.6 for Sept., down from 95.7 in Jun. Readings under 100 recommend below-trend expansion is present. 

In Sept., WTO economists downgraded global trade growth expectations for 2019 to 1.2 %, down from a 2.6% forecast in Apr. 

The deceleration of slowing global growth was attributed to “increased tariffs, Brexit-related uncertainty, and the shifting monetary policy stance in developed economies,” WTO analysts said.

Year-on-year growth in world merchandise trade volume has stalled in recent quarters, as new evidence shows a decline could be seen in early 2020. 

Airfreight, electronic components, and raw materials “have all deteriorated further below trend,” the report showed.

“Indices for export orders (97.5), automotive products (99.8), and container shipping (100.8) have firmed up into on-trend territory. However, the indices for international air freight (93.0), electronic components (88.2), and raw materials (91.4) have all deteriorated further below trend. Electronic components trade was weakest of all, possibly reflecting recent tariff hikes affecting the sector.” 

And with world trade sinking quick into year-end, the Baltic Exchange’s main sea freight index has just tagged a 4-1/2 month low on sluggish vessel demand. 

While the global economy implodes, a rally in global risk assets continues to push US equities to new highs. This is due to central banks pumping a tsunami of liquidity into stocks, in the attempt to save the world from a global trade recession that could be around the corner, if not already here.

…click on the above link to read the rest of the article…

Global Supply Chains Imploding As Quarter Of German Firms Plan To Leave China

Global Supply Chains Imploding As Quarter Of German Firms Plan To Leave China 

The Bussiness Confidence Survey 2019/20 published by the German Chamber of Commerce in China, in cooperation with KPMG in Germany, finds that almost a quarter of German companies operating in China are preparing to relocate production facilities. 

The survey was conducted from late July through mid-September and had 526 member companies out of 2300 respond. Out of the 526 member companies, 23% of the respondents said their factories will be transferred out of China or are contemplating the move.

Among the German companies leaving or actively planning to leave China, about 71% blame increasing labor costs; 33% cited unfavorable policy environment; 25% said the US-China trade war, and 22% said market access barriers. 

Of the respondents who’ve resorted to relocation, 52% have chosen Southeast Asia, 25% India, 19% Central/Eastern Europe, and 17% Western Europe. Only 5% of respondents said they were going to move operations to the US, contrary to President Trump’s claim that companies exiting China will be rushing to the US. 

Respondents said the US-China trade war had created a toxic and “gloomy” business outlook that has contributed to the global synchronized slowdown. 

About 83% of German companies said the trade war has directly or indirectly affected their operations. “Business expectations have dropped to their lowest level in years with only 27% of surveyed German companies expecting to reach or exceed their business targets in 2019,” the survey warned.

Jens Hildebrandt, Executive Director of the German Chamber of Commerce in China, said: “2020 is likely to be characterized by uncertainty, stemming from an unresolved US-China trade dispute related with a decelerating Chinese and global economy.”

German firms also said market access barriers and regulatory hurdles stunted their growth in China, with 66% of firms saying they’ve encountered either direct or indirect market access restrictions.

 …click on the above link to read the rest of the article…

Market Commentary: China Watch

Market Commentary: China Watch

I’ve held the view that Chinese finance has been at the epicenter of international market unease. The U.S./China trade war was not the predominant global risk. However, it has had the potential to become a catalyst for Chinese financial instability. And there remains a high probability for an eruption of Chinese disorder to quickly reverberate through global markets and economies. To be sure, rapidly deteriorating U.S./China relations were a major contributor to this summer’s global yield collapse and bond market dislocation.  

At this point, I’ll assume some “phase 1” deal gets drafted and then signed by Presidents Trump and Xi next month in Chile. In the grand scheme of things, little will have been resolved. It appears many of the most critical issues between the world’s two rival superpowers have been excluded from the initial compromise, I’ll assume tabled for some time to come. Short-term focused markets are content with a “truce,” welcoming a period of reduced risk of a rapid escalation of tensions.

Perhaps near-term financial risks have subsided in China. A counter argument would point out that Beijing’s push to improve its negotiating position forced officials to once again hit the Credit accelerator. Did Beijing push its luck too far? I would point to the $1 TN of additional household (chiefly mortgage) debt accumulated over the past year. China’s Household borrowings were up 15.9% in one year, 37% in two, 69% in three and 138% in five years. Importantly, Beijing’s stimulus efforts stoked China’s historic mortgage finance and apartment Bubbles already well into “Terminal Phase” excess. How deeply have fraud and shenanigans permeated Chinese housing finance? Similar to P2P and corporate finance?

 …click on the above link to read the rest of the article…

Geopolitical Signals Of Global Economic Crisis Abound

Geopolitical Signals Of Global Economic Crisis Abound

As I write this, news feeds are buzzing with questions and confusion over the October US/China trade talks. In September there was a massive propaganda campaign within the mainstream media to push the notion that a deal with China was imminent, which boosted markets otherwise on the verge of a plunge due to a hailstorm of bad financial news. This media campaign also indicated to me that there would be no deal in October – best case, there will be an announcement of “progress” and a temporary pause in tariffs, which will fall apart once again in a month’s time. Worst case scenario, the talks will falter before they ever really begin. Either way, the trade war will continue well into next year.

As I predicted in my article ‘The Ugly Truth About The Trade War’ in September:

“…Every couple of months the trade war deal hype is recycled and every couple of months the markets are hit with renewed disappointment. The latest trade talks are set for Octoberand if they happen at all, it is unlikely they will result in anything of significance. At most, they will be heralded as the “start of a great deal” and both sides will claim “progress was made”, and then, once again, nothing will happen and the conflict will accelerate. You would think people would have figured it out by now, but the investment world learns very slowly and functions solely on blind hope. At the very least, economic analysts are starting to realize that no deal is coming and that the situation is only going to get more tense. In fact, it is designed to get more tense…”

 …click on the above link to read the rest of the article…

An Inflationary Depression

An Inflationary Depression 

Financial markets are ignoring bearish developments in international trade, which coincide with the end of a long expansionary phase for credit. Both empirical evidence from the one occasion these conditions existed in the past and reasoned theory suggest the consequences of this collective folly will be enormous, undermining both financial asset values and fiat currencies.

The last time this coincidence occurred was 1929-32, leading into the great depression, when prices for commodities and output prices for consumer goods fell heavily. With unsound money and a central banking determination to maintain prices, depression conditions will be concealed by monetary expansion, but still exist, nonetheless.

Introduction

The unfortunate souls who are beholden to macroeconomics will read this article’s headline as a contradiction, because they regard inflation as a stimulant and a depression as the consequence of deflation, the opposite of inflation. 

An economic depression does not require deflation, if by that term is meant a contraction of the money in circulation. More correctly, it is the collective impoverishment of the people, which is most easily achieved by debasement of the currency: in other words, monetary inflation. Fundamental to the myth that an inflation of the money supply is the path to economic recovery are the forecasts by the economic establishment that the world, or its smaller national units, will suffer no more than a mild recession before economic growth resumes. It is not only complacent central bank and government economists that say this, but their followers in the private sector as well. 

It is for this reason that the S&P 500 Index is still only a few per cent below its all-time high. If there was the slightest hint that Corporate America risks being destabilised by a depression, this would not be the case.

 …click on the above link to read the rest of the article…

US Equity Futures Trade Near All Time High After ECB Goes All In

US Equity Futures Trade Near All Time High After ECB Goes All In

If it was Powell’s intention to have the S&P trade at an all time when he cuts rates by another 25bps next Wednesday, he achieved it.

S&P futures rose alongside Asian and European stocks as shares globally headed for a third weekly gain and a six week high as markets cheered signs of progress in US-China trade talks and the ECB’s just launched open-ended QE. Treasury yields climbed, with the US 10Y rising as high as 1.81%; the dollar slipped while the yuan rose and pound soared on easing no-deal Brexit fears.

 The resurgent risk appetite was largely the result of renewed trade war optimism after President Trump said on Thursday he was potentially open to an interim trade deal with China, although he stressed an “easy” agreement would not be possible.

Following a muted Asian session where many markets in the region were closed, we saw a groggy start in European trading after Bloomberg reported that most core European nations did not want to restart the ECB’s money printing program, the main bourses eventually traded well in the green, as basic resources and auto sectors outperformed, adding to what was already set to be a fourth straight week of gains.

“We have quite an interesting reaction to the ECB meeting with the sense of the pushback from the core countries, and that essentially that the ECB has now thrown its last cards in,” said John Hardy, head of FX strategy at Saxo bank. “It looks like we are also getting to some pretty interesting levels for yields. If the consolidation continues, at some point you have to question whether the easing (from the central banks) is actually there.”

…click on the above link to read the rest of the article…

Weekly Commentary: Dudley Sticks His Neck Out

Weekly Commentary: Dudley Sticks His Neck Out

What a fascinating environment; each week bringing something extraordinary. Yet there is this dreadful feeling that things are advancing toward some type of cataclysm.

“U.S. President Donald Trump’s trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook. This manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along? If the ultimate goal is a healthy economy, the Fed should seriously consider the latter approach… There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.” Bill Dudley, Bloomberg op-ed, August 27, 2019

The former president of the Federal Reserve Bank of New York’s piece galvanized an overwhelmingly negative response. Virtually everyone agrees it would be an outrage for the Fed to take such a plunge into the political maelstrom.  

A Federal Reserve spokeswoman responded: “The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment. Political considerations play absolutely no role.”

Former Treasury official Larry Summers weighed in (from CNBC interview): “The Fed’s job is to stay out of politics. The Fed’s job is to respond to the best assessment they can make of economic conditions and adjust the economy – interest rates – appropriately… But for a trusted former official of the Fed, whose thinking is inevitably going to be tied to the Fed, to recommend that they raise interest rates so as to subvert the economy and influence a presidential election is grossly irresponsible – is an abuse of the privilege of being a former Fed official… It is not the job of non-elected appointed officials to a technocratic role to decide how they’re going to act so as to constrain and influence the behavior the President of the United States – and the behavior of the remainder of the government of the United States. That is to misunderstand entirely the role of appointed officials in a democracy.” 

It’s Happening Again: Maersk Halts Asia-Europe Loop Amid Global Slowdown

It’s Happening Again: Maersk Halts Asia-Europe Loop Amid Global Slowdown  

Growth in the world continues to collapse into late summer, so much so that Maersk and Mediterranean Shipping Company (MSC) had to “temporarily suspend” their AE2/Swan Asia to North Europe loop until mid-November, removing 20,000 twenty-foot equivalent unit (TEU) a week from trade, reported The Loadstar.

Collapsing demand and plunging shipping container rates have led to pain for carriers who sail their vessels along the route. This is the second time Maersk and MSC have suspended the circuit, and the last time this happened was last fall.

Maersk and MSC said it’s working hard to “balance its network to match reduced market demand for the upcoming [Chinese factory shutdown] Golden Week.”

Maersk and MSC said the AE2/Swan suspension would “help us to match capacity with the expected weaker demand for shipping services” from Asia to Europe.

Maersk and MSC said the service would resume “in line with demand pickup,” suggesting the suspension could be extended into 1H20 as global trade isn’t expected to pick up for the next six to eight months. 

Maersk and MSC adopted a similar strategy last year, suspending AE2/Swan Asia to North Europe loop from September to December, this was right around the time when stock markets across the world crashed from October to December, on fears the world economy was slowing. It just so happens that the global synchronized slowdown is much worse this year, likely the world has entered a manufacturing/trade recession in late summer 2019.

The suspension of AE2/Swan loop will see 12 17,800-20,500 TEU vessels idled for the next several months. 

The last time the AE2/Swan loop was halted, it was during the period when world stocks collapsed last fall.

Freightos freight data for China to Europe 40 ft shipping containers shows muted price recovery over the last several years.

 …click on the above link to read the rest of the article…

Focus Is Increasingly On How Similar Conditions Are To The Lead Up To WW2: Rabobank

Focus Is Increasingly On How Similar Conditions Are To The Lead Up To WW2: Rabobank

Back with a bang

As mentioned on Friday, welcome to both La Grande rentrée and weltschmerz: and combining the two, this week we are ‘back with a bang’. That seems appropriate given yesterday marked 80 years since the start of WW2, which one would have thought would have received far more media coverage than it did: instead, far more focus was on how similar some conditions are to the lead up to WW2.

For just one market example, yesterday saw new US and Chinese tariffs kick in, taking a further step down the trade war path – if that is what one still insists on calling it. I underline that more holistic view of the US-China standoff as the Wall Street Journal reports that “SEC Revives Fight Over Inability to Inspect Chinese Auditors of Alibaba, Baidu”. The SEC could yet “impose more oversight on US-listed companies that rely upon those [Chinese] auditors. The measures could include forcing the firms to disclose more about their business or accounting and restricting their ability to sell new shares.” Given the Chinese firms are unlikely to comply, that is a potential step towards an eventual US delisting; and don’t forget there is also a push in the US Congress to stop US capital flows into China via bill S. 1731, which will get a further bipartisan tailwind when Congress returns on 4 September. In short, this is a whole other new front in the US-China struggle (capital flows, following tech limits and tariffs), not a ‘trade war’.

Markets May Focus on Dissenters in FOMC Minutes: Rabobank’s Foley

Let’s see just how weak CNY fixing, and CNY itself, are today. Indeed, after the Chinese manufacturing PMI stayed well below 50 over the weekend, will we take out the low of 7.1926 on the back of this news-flow? If not today, then soon, surely. And then where?

 …click on the above link to read the rest of the article…

US Slaps New Tariffs On China; One Minute Later China Retaliates

US Slaps New Tariffs On China; One Minute Later China Retaliates

The biggest reason for last week’s torrid stock market rally was rekindled “optimism” that the escalating trade war between the US and China may be on the verge of another ceasefire following phone conversations, fake as they may have been, between the US and Chinese side. This translated into speculation that a new round of tariffs increases slated for this weekend may not take place or be delayed.

However, that did not happen, and with no trade deal in sight, at 12:00am on Sunday, the Trump administration slapped tariffs on $112 billion in Chinese imports, the latest escalation in a trade war that’s ground the global economy to a halt, sent Germany into a recession, and given the market an alibi to keep rising because, wait for it, “a trade deal is imminent.”

Only, it isn’t, and 1 minute later, at 12:01am EDT, China retaliated with higher tariffs being rolled out in stages on a total of about $75 billion of U.S. goods. The target list strikes at the heart of Trump’s political support – factories and farms across the Midwest and South at a time when the U.S. economy is showing signs of slowing down.

The 15% U.S. duty hit consumer goods ranging from footwear and apparel to home textiles and certain technology products like the Apple Watch. A separate batch of about $160 billion in Chinese goods – including laptops and cellphones – will be hit with 15% tariffs on Dec. 15.  China, meanwhile, began applying tariffs of 5 to 10% on U.S. goods ranging from frozen sweet corn and pork liver to bicycle tires on Sunday.

 …click on the above link to read the rest of the article…

Hong King Kong

Hong King Kong

Of course the notion of addressing Hong Kong has been in my mind for a while, but it’s a bit of a moving target: things change all the time, and seemingly on the fly. However, with today’s fresh developments, it seems silly to wait any longer. Hong Kong Civic party lawmaker Dennis Kwok yesterday expressed the reason way better than I could:

As I said time and again, the use of troops in Hong Kong will be the end of Hong Kong, and I would warn against any such move on the part of the central people’s government.”

He said that before today’s arrests -and subsequent release on bail- of a handful of alleged protest leaders Joshua Wong, Andy Chan, and Agnes Chow. Who, if you read between the lines, didn’t lead much of anything; they may be figure-heads, but that’s not the same thing. The protests are either lacking leaders or everyone’s a leader, depending on who you ask. So why arrest them to begin with? You tell me.

What I did find enlightening was Reuters’ report yesterday on Beijing having rejected Hong Kong Chief Executive Carrie Lam’s (how is CEO a political function?) proposal to communicate with the protesters and perhaps allow some concessions to their demands. I know it’s only one source, but it appears quite feasible.

Carrie Lam is between a rock and a hard place, and she admits it -at least according to the Reuters piece-, though not to the protesters. Beijing is in exactly such a spot, but won’t admit it, ever. And that right there is Hong Kong’s main issue.

China Rejected Hong Kong Plan To Appease Protesters 

 …click on the above link to read the rest of the article…

Peter Schiff Compares Trade War to “Battle at Little Bighorn”

Peter Schiff Compares Trade War to “Battle at Little Bighorn”

Peter Schiff Compares Trade War to Battle at Little Bighorn
Photo by Gage Skidmore  | CC BY | Photoshopped

Political commentators are increasingly critical of U.S. trade policy, particularly tariffs and the trade war with China. Radio host Peter Schiff went so far as to compare U.S. trade policies to General Custer and the Battle of Little Bighorn. Meanwhile, some economic red flags seem to support their worries.

In today’s polarized political climate, there is one topic both the Left and the Right seem to agree on: the trade war with China is eventually going to hurt the average American.

Radio host Peter Schiff has been hammering on the economic dangers posed by tariffs for months. He even compared the resulting trade war with China to General Custer’s Last Stand.

“General George Custer met his doom charging into a battle he thought he could win against an opponent he did not understand. Based on [certain] views about the fast-emerging trade war with China, it looks to me that [the U.S.]…is charging into an economic version of Little Bighorn.

“By mistaking the real nature of international trade, the costs of tariffs, the effects of currency movements, and the supposed ease with which the United States could quickly re-establish itself as a low-cost manufacturer, [the U.S.] risks shredding the safety nets that have undergirded the U.S. economy for decades and plunging us into a war we are ill-equipped to fight.”

Those are strong words. But is Schiff’s Little Bighorn analogy accurate? Are these tariffs pushing the U.S. toward a disastrous economic “ambush” that could devastate America’s economy? Let’s look at some economic indicators to see what they point to.

Currency Manipulation

Marc Chandler, chief market strategist at Bannockburn, agrees that China’s recent currency devaluation is part of an escalating trade war: “This is another step in the currency war. This also makes trade more difficult.”

 …click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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