Date: August 9, 2018
U.S. Oil Vanishing From China Tariffs Reveals American Clout
The removal of U.S. crude from goods targeted by Chinese tariffs is a sign that America has become too big to ignore in the oil market. Less than two months after threatening to impose levies on imports of U.S. crude, the world’s biggest oil buyer has now spared the commodity. Only fuels such as diesel, gasoline, propane will be hit with duties on Aug. 23, according to China’s commerce ministry. That’s after the nation’s buyers, including top refiner Sinopec, began shunning American supplies to avoid the risk of tariffs. China’s original plan to target U.S. crude came at an inopportune time for the country’s buyers. Sinopec’s trading unit, Unipec, was embroiled in a dispute with Saudi Arabia, saying the producer’s prices were costly and cutting purchases just as it was boosting American imports. Two months on, refiners were faced with the risk of supply disruptions from Iran to Venezuela and paying more to take advantage of booming U.S. output. “The U.S. has been and will remain the main source of incremental crude production globally,” said Den Syahril, an analyst at industry consultant FGE. “With several new refineries starting up over the next couple of years, China would thus be wary of taking a decision that could end up severely hurting its domestic refining industry.” Before the tariff kerfuffle, U.S. crude exports to China had risen to 15 million barrels in June, the highest volume in data going back to 1996, according to U.S. Census Bureau and Energy Information Administration data. That made the Asian country the biggest buyer of American supply. The shale boom, meanwhile, lifted U.S. output to an unprecedented 11 million barrels a day last month, establishing it in the ranks of other top producers Russia and Saudi Arabia. The increase has also weakened the cost of American supply relative to Middle East benchmark Dubai and Atlantic Basin marker Brent, raising the allure of U.S. shipments to Asia — the world’s biggest oil consuming region.
Italian Bond Roller Coaster May Just Be Approaching Its Zenith
Italian bond investors may be about to face their biggest challenge yet. In the next few months, bondholders will have to navigate reviews from Moody’s Investors Service and Fitch Ratings, a budget in September and political headlines emanating from Rome. HSBC Bank Plc revised higher its forecast for 10-year yields, with strategist Steven Major cautioning that the securities may be prone to wide price swings. Societe Generale SA suggested that investors exit long positions in the nation’s government debt. Concern over the fledgling government’s spending plan rattled Italy’s bond market last week, with investors keenly watching how the populist coalition will reconcile tax cuts and a basic income for the poorest within the European Union deficit limit of 3 percent of gross domestic product, compared with its current 2.3 percent shortfall. Any sign Italy is going to breach the EU’s level could trigger further ructions. “The problem isn’t the fundamentals or the data, it’s what the government tries to negotiate and if it’s too radical, the market won’t like it,” Major, HSBC’s global head of fixed-income research, told Bloomberg Television. “That says to me I may not want the risk.” Italian 10-year bond yields dropped two basis points to 2.89 percent Thursday, having touched a two-month high of 3.1 percent on Aug. 3. The spread over those on their German peers was at 251 basis points. HSBC raised its year-end forecast for Italy’s 10-year yields to 2.7 percent, from 2.4 percent previously. Major said that daily moves of 100 basis points or more are “possible.” For Bank of America Corp., Italian bonds are in a highly unstable position and could finish the year with the yield spread narrowing to 170 basis points above those in Germany, or blowing out to 400 basis points over, depending on how the budget is received by investors. The latter level hasn’t been reached since the euro-area debt crisis.
China Announces Date to Match $16 Billion U.S. Tariffs
China confirmed that it will impose 25 percent tariffs on an additional $16 billion worth of imports from the U.S. from Aug. 23, matching an earlier move from Washington in another ratchet higher for the trade war between the two nations. The U.S. decision to levy 25 percent tariffs on the same value of Chinese goods is “very unreasonable,” and China will have to retaliate to protect its rightful interests and the multilateral trading system, China’s Ministry of Commerce said in a statement. The tit-for-tat protectionist measures are poised to surge even higher, with the U.S. reviewing 10 percent duties on a further $200 billion in Chinese imports that it may even raise to 25 percent after a comment period ends on Sept. 6. Should the U.S. proceed with those tariffs, China’s ready to slap duties on an additional $60 billion of American goods. “We’re not yet past the point of no return but we’re edging closer to it,” said Wang Tao, head of China economic research at UBS AG in Hong Kong. “The risk is that the U.S. administration’s gamble to strong-arm China into giving into all U.S. demands without some compromise only leads to successive rounds of higher and higher tariffs.” President Donald Trump has suggested he may tax effectively all imports of Chinese goods, which reached more than $500 billion last year. Reserve Bank of Australia Governor Philip Lowe Wednesday warned that escalation of the dispute could be “very damaging for the world economy.” China’s exports grew faster than expected in July, while imports surged, showing both domestic and international demand continue for now to shrug off the uncertainty of the trade conflict with the U.S. The world’s largest exporter, China is still benefiting from robust global demand even as increasing tensions and rising trade barriers with the U.S. weigh on the outlook.