April 13, 2018
Stocks Gain as Focus Shifts From Trade to Earnings: Markets Wrap
Stocks gained as investors took heart from further easing in trade tensions and started focusing on the U.S. earnings season. The dollar erased an earlier loss as Treasury yields steadied above 2.8 percent. The Stoxx Europe 600 gauge reached a six-week high, led by raw-material producers as industrial and precious metals advanced. S&P 500 index futures signaled a higher U.S. open after JPMorgan Chase & Co. first-quarter earnings beat estimates and Chief executive Jamie Dimon struck an upbeat tone on the outlook for the economy. Traders are awaiting reports from other financial heavyweights including Citigroup Inc. Friday. A week after escalating tensions with his threat to impose tariffs on an additional $100 billion in Chinese products, President Donald Trump on Thursday expressed optimism on trade deal with China and hinted that the U.S. may rejoin the Trans-Pacific Partnership free-trade deal that he pulled out of shortly after taking office. That boosted shares of trade-sensitive sectors including commodities and builders. Aluminum headed for its biggest weekly increase since at least 1987 on concern U.S. sanctions on Russia’s United Co. Rusal will disrupt supplies. Copper, zinc and nickel also gained, along with gold. WTI crude reversed, declining for the first time this week, as the dollar pared its loss. Oil’s earlier rise was sparked by escalating tensions in the Middle East after the International Energy Agency said a global glut that weighed on prices is close to being cleared.
ECB Looks Down Exit Path as Politics Threaten to Damp Growth
The European Central Bank is finding out just how tricky its policy path could be in a year when political spats are overshadowing the economy. The account of the March 7-8 Governing Council meeting listed concerns including that U.S. import tariffs — announced just before the gathering — would hurt “all countries involved.” It also pointed to potentially unforeseen consequences of Britain’s withdrawal from the European Union and economic slack that might be greater than previously thought. Policy makers were still confident enough to remove their pledge to ramp up asset purchases should the outlook deteriorate. At least one official suggested the euro area might be close to the self-sustained growth and inflation needed to halt that scheme. Five weeks on, the data have weakened and the direction of the trade dispute between the U.S. and China, the world’s two biggest economies, is more unclear than ever. “The ECB may look at a longer wind-down of the program,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam. “It would be a major surprise if they decided to extend once again, but considering the level of uncertainty right now, a longer exit path could be a logical option.” The latest blow hit a couple of hours before the account was published, with a report that euro-zone industrial production unexpectedly shrank for a third month. Multiple measures this year have missed economists’ estimates, suggesting last year’s 2.3 percent expansion may have been the peak.
U.K. Brand May Not Be Enough to Woo Food Importers Post Brexit
Iconic British images such as London’s red buses may be known the world over, but a low awareness of U.K. food could make it difficult for the country to crack new export markets once it leaves the European Union. In a survey conducted across nine countries including Canada, China and India, 34 percent of consumers had never bought British food products, the U.K.’s Agriculture & Horticulture Development Board said in a report. Forty-three percent didn’t have any specific associations with British food and only a fifth had a positive perception of it. “Britain has a great story to tell, with the Union flag, Big Ben and the London bus well recognized across the world,” said Christine Watts, chief communications and market development officer at the AHDB. “But while these iconic images can form part of a powerful brand for the promotion of inbound tourism, they are not enough to sell our food and farming products overseas.” The findings come at crucial time for Britain’s food and drink industry, whose exports totaled more than $18 billion in 2015. There’s uncertainty over what trade deals the U.K. will have with nations inside and outside of the EU post Brexit, while farmers and manufacturers are also worried about access to overseas labor, potential border delays and increased paperwork and costs. Still, 37 percent of respondents in the survey indicated they’d pay a premium for British food. About 4,500 consumers were surveyed in countries in North America, Europe, Asia and the Middle East.
S&P Raises Japan’s Outlook to Positive on Stronger Growth
Standard & Poor’s raised its outlook for Japan to positive from stable, citing healthier economic growth prospects, the credit-rating company said on Friday. Nominal growth exceeding 2 percent and negative effective real interest rates would enable relative debt to stabilize sooner than previously anticipated, S&P said. The outlook could return to stable if growth is weaker than expected and fiscal consolidation slows, it said. Japan’s sovereign risk is low thanks partly to its large current-account surplus, according to Masamichi Adachi, senior economist at JPMorgan Securities Japan. The direct impact on Japan of S&P’s change would likely be minimal, Adachi said, but it would confer some confidence that the government’s policies are having their desired effects. “This is sort of a message that S&P believes Abenomics is working well,” he said.
China Has Much to Gain by Resolving Trade Issues With U.S.
Almost all economists agree that a full-blown trade war would leave both China and the U.S. worse off. A simple game theory framework shows that international trade is inherently a “cooperative game,” especially when consumption and production chains are tightly interconnected across borders. If the game is played uncooperatively, the hoped-for gains for specific activities and segments of the population would pale in comparison to the losses for big majorities in each country. That would be true even if the (few) winners from widespread protectionism tried to compensate the (many) losers. For that reason alone, many expect China and the U.S. to find a solution that would result in fairer but still-free trade (similar to the hoped-for outcome in the negotiations to modernize the North American Free Trade Agreement between Canada, Mexico and the U.S.). This hope is enhanced by another argument that hasn’t received sufficient attention: By acceding to mounting external demands on intellectual property and excessive trade barriers, China would be accelerating three longer-term transitions that it has willingly embarked on or knows that it will be necessary to undertake. For years, as it navigates what economists call the “middle-income transition” — one of the hardest phases in economic development — China has been gradually redirecting its growth engines away from exports and toward internal demand. Along the way, it has been moving from inefficient investments by state-owned enterprises toward private consumption. Further trade liberalization would assist this process. Reducing trade barriers and adhering to widely-accepted intellectual property norms would also be consistent with a second important developmental transition for China: The gradual increase in its willingness to assume greater global responsibilities, consistent with its overall size in the world economy.