November 29, 2019
Markets Show U.S. Gaining Upper Hand Over China in Trade War
“The U.S. is starting to overtake China in the trade war, at least in financial markets. Treasuries have held on to this year’s rally, the dollar remains strong despite three interest-rate cuts and U.S. stocks have been notching a string of records. Meanwhile, Chinese shares, the yuan and the country’s government bonds have recently struggled to find momentum. An equities sell-off accelerated on Friday, when a sudden tumble in Hong Kong stocks spilled over to the mainland market, where investors took profits in crowd favorites like Kweichow Moutai Co. The outperformance has been especially notable in the past months, with the S&P 500 Index trading at its priciest multiple ever relative to the Shanghai Composite Index. It highlights the diverging forces driving sentiment in the countries’ financial markets: the Federal Reserve’s dovish tilt the past year has supported risk sentiment in the U.S., whose economy has held up better than anticipated. In China, the central bank has stuck to its prudent approach to stimulus despite a string of disappointing economic data. The fallout has included increased financial stress and economic growth expanding at the slowest pace since at least the early 1990s. “The U.S. stock market has been really strong, while momentum in Chinese stocks seen at the beginning of the year has kind of waned,” said Gerry Alfonso, executive director of the international business department at Shenwan Hongyuan Group Co. “China’s slowdown has impacted investor sentiment even more than developments on the trade front.” In August, the U.S. and Chinese stock benchmarks were the most highly correlated in four years. But that relationship evaporated, with the S&P 500 climbing 7.2% since June 30 while the Shanghai Composite has lost 3.6%. “Global investors see a trade war leading to greater risk for investment in China,” and emerging markets than the U.S., said Hyde Chen, an equity analyst with UBS Wealth Management in Hong Kong. “U.S. stocks fared better because Asia’s economy as a whole suffers more from trade impact.” Investors have been demanding the most compensation to hold Chinese sovereign bonds relative to U.S. Treasuries in two years. The spread between the countries’ 10-year bond yields widened to 1.6 percentage points in October, as liquidity concerns kept China’s bonds from joining in on a global debt rally. In late 2018, the yield gap shrank to its smallest since 2010, just 25 basis points. The currency of a country easing monetary policy often weakens. But the ICE U.S. Dollar Index has risen more than 2% this year while the yuan has struggled, in August weakening beyond 7 per dollar for the first time since 2008. That weakness prompted the U.S. to label Beijing a currency manipulator. Falling transaction volume shows yuan traders are preferring to stay on the sidelines for now, as a U.S. bill supporting Hong Kong protesters threatens to get in the way of a phase one trade deal. The Shanghai Composite Index is up 15% for the year following its drop on Friday, versus a peak of 31% in April. That’s a relatively solid performance considering the headwinds facing China’s economy, according to analysts at both Goldman Sachs Group Inc. and Morgan Stanley. Both brokerages this month cut their view on A-shares to neutral from overweight after this year’s advance, saying foreign inflows may slow following this year’s heavy purchases. Meanwhile, sub-6% economic growth in China — which Goldman Sachs is predicting for 2020 — may provoke “concerns among market participants.” ”
Euro-Area Inflation Quickens, But Remains Far Below ECB’s Goal
“Euro-area inflation accelerated in November, offering some comfort for the European Central Bank whose monetary stimulus has attracted increased scrutiny over potentially detrimental side effects. The rate picked up to 1% from a three-year low of 0.7% in October, beating expectations for a 0.9% reading. More importantly, a measure stripping out volatile components quickened to 1.3%, the highest in seven months. The headline rate is still well below the ECB’s goal of just under 2%. Recent shifts in inflation have been driven by energy, and the central bank has warned that underlying price pressures are “muted.” The ECB has been struggling to lift inflation despite years of ultra-loose policy. The latest stimulus salvo included cutting interest rates further below zero and a fresh round of quantitative easing that’s set to continue until inflation is firmly tethered to its goal. But the high degree of monetary support is attracting increasingly intense criticism. Sub-zero rates have riled German savers and raised the specter of pension cuts in the Netherlands. Banks across the euro area are also blaming the policy for their poor profitability. In its latest Financial Stability Review, even the ECB warned of potential side effects, including threats to investment funds, insurers and in some real estate markets. The ECB is likely to take stock of its experience when it starts a strategy review early next year under new president Christine Lagarde. Policy makers expect to tweak their inflation target — fixing it at 2%, but will struggle to go much further than that, according to officials with knowledge of the matter. Separately, the Eurostat said on Friday that euro-area unemployment dropped to 7.5% in October, the lowest since July 2008. Yet regional differences remain significant. While in Germany, only 3.1% of the working population remained without a job, the figure stood at 16.7% in Greece and 14.2% in Spain.”
China Financial Warning Signs Are Flashing Almost Everywhere
“From rural bank runs to surging consumer indebtedness and an unprecedented bond restructuring, mounting signs of financial stress in China are putting the nation’s policy makers to the test. Xi Jinping’s government faces an increasingly difficult balancing act as it tries to support the world’s second-largest economy without encouraging moral hazard and reckless spending. While authorities have so far been reluctant to rescue troubled borrowers and ramp up stimulus, the costs of maintaining that stance are rising as defaults increase and China’s slowdown deepens. Policy makers are attempting to do the “minimum necessary to keep the economy on the rails,” Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs Group Inc., said in a Bloomberg TV interview. Among China’s most vexing challenges is the deteriorating health of smaller lenders and regional state-owned companies, whose financial linkages risk triggering a downward spiral without support from Beijing. A landmark debt recast proposed this week by Tewoo Group, a state-owned commodities trader, has raised concerns about more financial turbulence in its home city of Tianjin. Concerns have popped up across the country in recent months, often centered around smaller banks. Confidence in these institutions has waned since May, when regulators seized control of a lender in Inner Mongolia and imposed losses on some creditors. Authorities have since intervened to quell at least two bank runs and orchestrated bailouts for two other lenders.”
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