Date: November 18, 2019
U.S., China Trade Negotiators Discuss Concerns of Phase One
“U.S. and Chinese trade negotiators held “constructive discussions” in a phone call on Saturday to address each side’s core concerns of phase one of the trade deal. China’s Vice Premier Liu He, the country’s key negotiator in the trade talks with the U.S., spoke with Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer, according to the Chinese Commerce Ministry. The call was held at the request of the U.S. negotiators, and the two sides agreed to remain in close communication, it said in a statement. The phone call came after President Donald Trump’s administration signaled talks with China over the first phase of a broad trade agreement are entering the final stages. That’s when the most contentious and complex issues are debated, with no guarantee that another breakdown will be averted. White House economic adviser Larry Kudlow told reporters late Thursday in Washington that “we are coming down to the short strokes” and are “in communication with them every single day.” Still, he acknowledged a deal was close though “not done yet.” The last stages of trade agreements are often where talks break down, and Trump still hasn’t publicly indicated his approval. The two sides were close to concluding a pact about six months ago, only for the U.S. to claim that China backed away from verbal commitments when the time came to sign the deal. The two sides have held working-level video conferences focused on issues ranging from the details and timeline of Chinese purchases of U.S. agricultural goods such as pork and soybeans to commitments to curtail theft of intellectual property that Trump is demanding from China, according to people familiar with the discussions. U.S. stocks rose to all-time highs and Treasuries edged lower Friday following Kudlow’s comments. The S&P 500 reached another record and gained for the sixth week in a row, the longest streak in two years. Both the Dow Jones Industrial Average, which past 28,000 for the first time, and the Nasdaq Composite also hit all-time highs. The dialog on Saturday followed a phone call between the trade negotiators earlier this month, where the two countries signaled they’re getting closer to agreeing on the first phase of a deal aimed at reducing tensions in a trade war that’s slowed the global economy. The three spoke by phone at the time and separately released statements describing the call as “constructive.” ”
Pound Touches Six-Month High Against Euro on Optimism for Brexit
“The pound rallied to a six-month high against the euro as the Conservatives threw their weight behind the prime minister’s Brexit plan, raising hopes for a smooth departure from the European Union. Sterling strengthened versus all of its Group-of-10 peers after Boris Johnson said every Conservative candidate has signed a pledge to vote for his Brexit deal if elected next month. This, together with opinion polls showing the Tories in the lead and Jeremy Corbyn’s Labour Party struggling, boosted confidence the Conservatives could get a Brexit deal through Parliament in time for Jan. 31 and end the U.K.’s political stalemate. “Both culminate in the same outcome, which is that the withdrawal agreement has a higher chance of going through,” said Jane Foley, head of currency strategy at Rabobank. The pound’s “performance in the last few weeks has been linked to this perception that if the withdrawal agreement gets through Parliament then Brexit is done and sterling goes up.” Strategists see a Conservative majority as the best outcome for the Dec. 12 vote, as it would mean Johnson can push through his Brexit plan and remove some of the uncertainty that has been a function of investing in the U.K. since the 2016 Brexit referendum. Traders worry that an outright win by Labour could hurt the pound, given plans to ramp up spending, nationalize utilities and hike taxes for the rich that could open up the risk of capital flight. Sterling gained as much as 0.5% versus the euro to 85.22 pence, the highest since May 6. It strengthened as much as 0.7% to $1.2985. The yield on U.K. 10-year government bonds gained three basis points to 0.75%. Johnson took the decision to call the snap poll after lawmakers agreed to back his Brexit deal in principle but then fell short of giving it their full backing. His predecessor Theresa May failed three times to get her plan through Parliament, leading to the end of her premiership. Johnson will be hoping that his election gamble pays off and secures him a majority that can pass the deal and thus move on to the next phase of Brexit — securing a future trade agreement. The pound has outperformed all other currencies in the world so far this quarter, gaining 5.4% versus the dollar and 3.8% against the euro. Still, not everyone is convinced an end to the Brexit deadlock will mean sustained gains for the currency. For Rabobank’s Foley, the market is losing sight of what comes next. If the prime minister does get his deal through Parliament, the U.K. will then have to begin trade talks with the European Union, a process that could be complicated by having many pro-Brexit lawmakers opposed to regulation inside the ruling party. The economy is also giving investors reason to be cautious. Algebris portfolio manager Alberto Gallo is neutral on the pound as he sees the currency staying under pressure. The annual pace of economic expansion in the U.K. fell to the lowest in almost a decade last quarter, according to last week’s data. “Over the longer term, risks to sterling remain to the downside as uncertainty continues to weigh on the investment and growth, leaving little room for the Bank of England to normalize rates,” Gallo said in an interview last week.”
China Bond Traders Still on Edge After Rate Cuts Spur Mini Rallies
“While China’s central bank is helping stem the panic that in October drove its bond yield to five-month highs, Monday’s buoyant mood is unlikely to last. A series of unexpected policy-rate cuts and liquidity injections keep triggering mini rallies in China’s sovereign-debt market this month. The latest came Monday, when the People’s Bank of China lowered borrowing costs on short-term loans for the first time since 2015 and injected $26 billion into the financial system. China’s 10-year benchmark yield fell 5 basis points to dip below 3.19% for the first time in a month. It’s deja vu for bond investors who saw yields drop twice before in November following similar supportive actions from the central bank. But any bond rally will be limited as Beijing’s prudent approach to stimulus hasn’t changed, while a trade agreement may boost risk sentiment, according to Tommy Xie, an economist at Oversea-Chinese Banking Corp. “The rate cuts are helpful in turning around the negative sentiment but they’re not a game changer,” Xie said. The small adjustment to the rates — Monday’s cut was just 5 basis points — signal a continuation of the PBOC’s restrained stimulus policy that prevented Chinese bonds from joining in a global rally this year. That’s even as data continues to show weaker economic growth across the board. Inflation remains a top concern for investors, said Zhou Hao, a senior emerging markets economist at Commerzbank AG. Accelerating inflation due to soaring pork prices in China have depressed real yields, taking them negative for the first time in seven years. Beijing will want to avoid adding too much liquidity, which risks stoking prices even more. “It’s difficult to be very bullish on the outlook for bonds because the issue of rising inflation can’t be ignored,” he said. “I don’t think this is a turning point for bonds.” ”
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