Overseas Headlines- August 29,2018

Date: August 29, 2018 

United States:

Trump Says U.S. to Pursue Mexico Trade Deal to Replace Nafta

President Donald Trump said the U.S. is pursuing a new trade accord with Mexico to replace the North American Free Trade Agreement and called on Canada to join the deal soon or risk being left out. Trump announced the agreement with Mexico in a hastily arranged Oval Office event Monday with Mexican President Enrique Pena Nieto joining by conference call. Pena Nieto said he is “quite hopeful” Canada would soon be incorporated in the revised agreement, while Trump said that remains to be seen but that he wanted those negotiations to begin quickly. Canadian Foreign Minister Chrystia Freeland is leaving a trip in Europe early to travel to Washington for Nafta talks on Tuesday, spokesman Adam Austen said on Monday. Canada and the U.S. are still at odds over some key issues. The U.S. and Mexico agreed to increase regional automotive content to 75 percent from the current 62.5 percent in Nafta, with 40 percent to 45 percent of production by workers earning at least $16 an hour, the U.S. Trade Representative’s office said in an emailed statement. They agreed to review the deal after six years, softening a demand by the U.S. for a clause to kill the pact after five years unless it’s renewed by all parties. Duty-free access for agricultural products will remain in place, USTR said. The peso rallied, and the Canadian dollar also advanced. U.S. stocks rose, with the S&P 500 Index closing just short of 2,900 and the Nasdaq Composite Index topping 8,000 for the first time. Automakers and railroads were among the top gainers. As he announced the move, Trump said he would drop the name Nafta from the accord because of its unpopularity. “We’re going to call it the United States/Mexico Trade Agreement,” he said. Nafta “has a bad connotation because the United States was hurt very badly by Nafta for many years.”



Italy Reportedly May Reach Out to ECB on New Bond Purchases

Italy might be relying on the hope of a new round of government-bond purchases by the European Central Bank to shield its public debt from financial speculation and the threats of a rating downgrade. Newspaper La Stampa reported that the government may reach out to the ECB about such a move. The new QE-styled program could have a different name if needed, La Stampa said, citing an unnamed official and providing no further details. The euro weakened for the first time in four days, slipping 0.2 percent to $1.1678 as of 9:30 a.m. Rome time. Italian bonds rose, pushing 10-year yields down 3 basis points to 3.16 percent as of 10:21 a.m. Rome time. The Frankfurt-based central bank declined to comment on the report, while no one from the press office of Prime Minister Giuseppe Conte in Rome was immediately available. Italian officials have previously voiced a desire for support from the ECB. Cabinet Undersecretary Giancarlo Giorgetti said earlier this month he hoped that the ECB’s quantitative easing program would be extended to help protect the country from financial speculators. The La Stampa story follows a report last week from Corriere della Sera on Giuseppe Conte winning a pledge from Donald Trump at a July meeting in Washington that the U.S. will buy Italian government debt. In a summer dominated by news and commentary on Italy’s budget plans and fiscal issues, yet another report said Italy called on China to buy its bonds. That was dismissed as groundless by Finance Minister Giovanni Tria who is currently in China on an official visit. The goal of the mission to China is “certainly not to seek buyers for government bonds,” Tria told China Radio International in an interview posted Monday on the station’s website. Speaking to reporters in Beijing on Tuesday, the finance chief said that Italy isn’t planning to breach the European Union’s budget deficit limit of 3 percent of gross domestic product, in contrast to remarks made just hours earlier by deputy premier and leader of Italy’s ruling Five Star Movement party Luigi Di Maio.



Turkish Lira Drops as Central Bank Move Fails to Lift Confidence

Turkey’s lira extended its slump to a third day as a central bank move on overnight borrowing limits failed to bolster investor sentiment. The dollar surged as much as 2 percent against the lira, which led declines among emerging-market currencies. The central bank said on Wednesday it is altering banks’ borrowing limits for overnight transactions, which effectively tightens liquidity by ending unrestricted funding it has offered since Aug. 13. The central bank has announced a series of measures in recent weeks to try to contain a slide of more than 40 percent in the lira this year. Yet investors do not see policy makers’ approach to market pressure as a sustainable way to tackle double-digit inflation and a widening current-account deficit. “It’s yet more smoke and mirrors from the central bank,” said Nigel Rendell, an analyst at Medley Global Advisors LLC in London. “The change in banks’ overnight borrowing limits is aimed at trying to ease pressures on the banking system, rather than tackling Turkey’s underlying problem, which remains persistently high inflation.” The lira was trading 1.6 percent lower at 6.3746 per dollar as of 11:36 a.m. in Istanbul. Together with the Argentine peso, it’s the worst-performing emerging-market currency this year. The yield on 10-year bonds climbed 19 basis points to 21.95 percent, after touching a record high earlier this month. Data on Wednesday showed an index of Turkish economic confidence fell to the lowest level since 2009 in August, while the country’s trade deficit widened in July from the previous month. The central bank, which next meets to decide policy on Sept. 13, has got “zero bang for its buck” in Wednesday’s move, given the renewed lira selling, Rendell said. “The downward currency trend will continue until monetary policy is significantly tighter,” he said. “If the bank really wants to stop the rout and is serious about tackling ever-higher inflation, it needs to raise interest rates by at least 500 basis points.”