Overseas Headlines- January 7, 2019

Date: January 7, 2019


United States:

Shutdown Puts $200 Million a Day in Federal Contracts at Risk

If recent history is any guide, federal contractors could be out more than $200 million a day in lost or delayed revenue from the partial government shutdown, based on data compiled by Bloomberg. The companies run the gamut, from businesses that provide upgrades to flight communications and air traffic systems, to producers of anti-malarial and HIV medicines in Africa, to operators of government cafeterias. Since Dec. 22, thirteen major federal departments and agencies have closed as Republicans and Democrats argue over whether Congress should provide President Donald Trump with money to build a wall along the U.S. border with Mexico. Those agencies have mostly stopped awarding new money for contracts. In the fiscal year that ended Oct. 1, those agencies announced $89.3 billion in obligations to contractors, an average of $245 million each day, according to reports from federal databases. The Department of Homeland Security, NASA, and the State Department accounted for more than half those funds. The shutdown has halted most contract obligations at the following agencies. Here’s how much those agencies awarded in contracts in the 2018 fiscal year. The data don’t reveal which companies aren’t getting paid. But using reports from federal databases, Bloomberg Government calculated the contractors that received the most money in obligations from those 13 agencies in the latest fiscal year. Near the top of that list are a number of publicly traded companies, including Boeing Co., General Dynamics Corp. and Leidos Holdings Inc.



Europe Stocks Erase Optimistic Start as Defensive Sectors Drop

European equities erased earlier gains as food and health care shares declined and optimism stemming from China’s monetary easing evaporated. The Stoxx Europe 600 Index lost 0.4 percent after rising as much as 0.4 percent earlier. Nestle SA dropped 1 percent and Anheuser-Busch InBev SA/NV dropped 2.1 percent after Goldman Sachs Group Inc. cut the stock to neutral. Novartis AG retreated 1.9 percent. European stocks lost 13 percent in 2018, the worst performance since the 2008 financial crisis, as a mix of political and economic growth concerns pushed investors to exit. Although the People’s Bank of China cut required reserves for banks, softening its policy amid trade tensions with the U.S. and oil heading for its longest rally in more than 17 months, traders’ optimism was fleeting. Miners, which were battered last year by the U.S.-China trade war, advanced on optimism that growth in China will remain robust. Citigroup Inc.’s strategists continued to stick with their pro-cyclical stance on bets that there won’t be a recession in 2019. Their key recommended pairs are resources versus industrials, health care versus utilities and banks versus insurance. The FTSE 100 Index dropped 0.6 percent even as lawmakers called on Theresa May to rule out a no-deal Brexit. The DAX Index retreated 0.4 percent after German factory orders fell more than expected in November.



China Has a Dangerous Dollar Debt Addiction

China’s foreign debt has been rising rapidly, and that’s becoming an increasingly big problem — for the country and, potentially, the world. Officially, China lists its outstanding external debt at $1.9 trillion. For a $13 trillion economy, that’s not a major amount. But focusing on the headline number significantly understates the underlying risks. Short-term debt accounted for 62 percent of the total as of September, according to official data, meaning that $1.2 trillion will have to be rolled over this year. Just as worrying is the speed of increase: Total external debt has increased 14 percent in the past year and 35 percent since the beginning of 2017. External debt is no longer a trivial slice of China’s foreign-exchange reserves, which stood at just over $3 trillion at the end of November, little changed from two years earlier. Short-term foreign debt increased to 39 percent of reserves in September, from 26 percent in March 2016. The true picture may be more precarious. China’s external debt was estimated at between $3 trillion and $3.5 trillion by Daiwa Capital Markets in an August report. In other words, total foreign liabilities could be understated by as much as $1.5 trillion after accounting for borrowing in financial centers such as Hong Kong, New York and the Caribbean islands that isn’t included in the official tally. Circumstances aren’t moving in China’s favor. The nation’s companies rushed to borrow in dollars when there was a 3 percent to 5 percent spread between Chinese and U.S. interest rates and the yuan was expected to strengthen. Borrowing offshore was cheaper and offered the additional bonus of likely currency gains. Now, the spread in official short-term yields has shrunk to near zero and the yuan has been depreciating for most of the past year. Refinancing debt in dollars has become harder, and more risky.