Date: August 28, 2018
Trump Focus on Mexico Trade Dashes Hope for Quick China Progress
The Trump administration is putting trade negotiations with China on the back burner while focusing first on resolving issues in the North American hemisphere, reaching a breakthrough agreement between the U.S. and Mexico. The White House believes it’s important to resolve trade disputes in “our own neighborhood” quickly and favorably, U.S. Commerce Secretary Wilbur Ross told Fox Business News on Tuesday. Ross said President Donald Trump’s position is that it’s currently not the best time for negotiations with China, denting expectations of a fast resolution. Speaking to reporters during his announcement Monday of the new Mexico accord, Trump said he is rejecting overtures from China to negotiate as he tries to achieve a less “one-sided” trade policy. “They want to talk,” Trump said. But “it’s just not the right time to talk right now, to be honest.” Trump’s remarks are his latest in recent weeks to suggest he doesn’t see a quick end to trade tensions with China, stoking concerns in Beijing that his actions are part of a wider plan to contain the nation’s rise. Fears are growing that the spat between the world’s biggest economies may spill over into geopolitical flash points, from North Korea to Taiwan. Negotiations between the U.S. and China have been stalled since May, when Trump put a stop to a deal for China to buy more energy and agricultural goods to narrow the trade deficit. After mid-level trade talks in Washington last week ended with no agreement, a person familiar with the discussions said that Chinese officials had raised the prospect of suspending talks until after U.S. congressional elections in November.
Italian Bonds Fall as Budget Concerns Continue to Hit Investors
Italian bonds fell as the country’s Deputy Prime Minister reportedly said the government may breach the European Union’s deficit limit. The nation’s benchmark 10-year bonds fell for a fifth day after Luigi Di Maio said in an interview with a local newspaper that the government may break the bloc’s 3 percent deficit pledge if that’s what’s needed to increase investment spending and boost the economy. With Italy preparing to unveil its budget next month, tensions between the EU and the nation’s populist administration have unnerved investors who fear the country is on a collision course over its fiscal plans. Tuesday’s decline in Italian bonds pushed the yield on the 10-year notes up by four basis points to 3.21 percent, edging toward the 3.44 percent high seen in May as the euroskeptic administration’s ascent to power in Rome led to a meltdown in the country’s bond market. Continuing tensions since then have caused Italy to become the epicenter of euro-area financial volatility. “We just have the ongoing concerns and comments as Italy prepares the budget,” said Richard Kelly, head of global strategy at Toronto-Dominion Bank. “We are testing the recent highs again in 10-year yields so the biggest near-term risk is we trade through there and potentially push the range back up toward 3.50 percent.” In the run-up to the budget, banks including Societe Generale SA have recommended cutting exposure to the nation’s assets. Italy’s coalition government is set to come up with public-finance and economic-growth targets by Sept. 27, with a draft budgetary plan to be submitted to the European Commission by Oct. 15.
German Banks Are Piling Into Cheap Debt
German banks are suddenly in an enviable position in Europe’s bond market. Lenders in the largest euro-zone economy are reveling in a new-found freedom to sell low-cost senior preferred bonds after the government last month rewrote debt rules that had driven up their borrowing costs. The banks also benefit from debt cushions that surpass requirements by tens of billions of euros — something other European lenders can only dream of as they work to close gaping shortfalls. German banks “can issue senior preferred bonds at quite good levels, as they have such large buffers,” said Suvi Platerink Kosonen, a bank credit analyst at ING Groep NV. “The rest of Europe is coming from a different direction — building buffers little by little.” Non-German banks need to sell about 150 billion euros ($175 billion) of costly bail-in bonds by 2022, according to CreditSights estimates, after regulators in countries including France and Spain took a different approach to Germany in meeting new bank-capital standards. German lenders are free from these concerns and can instead focus on selling cheap senior preferred notes — Berlin Hyp AG, Commerzbank AG and Deutsche Bank AG issued a combined 3.05 billion euros of the low-risk notes in debut sales last week. “Investor response for senior preferred bonds has been positive,” said Jonathan Blake, Deutsche Bank’s head of issuance. “Demand is helped by the single A rating and relative remoteness from bail-in.” Commerzbank paid 65 basis points above midswaps to sell 10 year preferred senior notes last week, versus 82 basis points on senior non preferred notes in February. The lower risk notes let the bank pare funding costs even amid a general widening of spreads in Europe’s bond market this year.
Early Indicators Show China’s Economy Weakening Again in August
The earliest indicators for China’s economy show that the pace of expansion slowed for a fourth month in August, highlighting the pressure for the government to push through pro-growth policies. The data suggest the economy weakened further as demand from trading partners lost steam, with the decline in stock prices reflecting worsening sentiment. That’s according to a Bloomberg Economics gauge aggregating the earliest available indicators on business conditions and market sentiment. Amid rising fears about a trade war, policy makers have unveiled measures to boost infrastructure construction and credit to smaller firms, as well as tax cuts. Such measures will take time to actually have an effect so the slowdown will probably continue, although analysts are looking at evidence of better sentiment in commodity markets. It will take at least a few months for the economy to hit bottom and start recovering, according to Bloomberg Chief Asia economist Chang Shu, who doesn’t see any impact of the government’s measures yet. “It’s like a big ship — it will take a bit of time to shift its course.” The first official data for August, the purchasing managers index for manufacturing and non-manufacturing sectors, will be released Friday at 9 a.m. Both will decline slightly, according to economists surveyed by Bloomberg. External demand is also less likely to support the economy. U.S tariffs will hit Chinese exports and in addition, there was a deterioration in the weighted average of the flash PMI readings of trade partners including the U.S., the European Union and Japan.