Overseas Headlines – October 2, 2018

Date: October 2, 2018

Untied States:

Powell Doesn’t See High Recession Risk Though Eyeing Yield Curve

Federal Reserve Chairman Jerome Powell played down the signal being sent by a flatter yield curve and said the risk of recession was not especially high. “There’s no reason to think that the probability of a recession in the next year or two is at all elevated,” he told a gathering of business leaders Thursday in Washington hosted by Rhode Island Senator Jack Reed. “We look at the yield curve but it’s one factor. It’s not inverted now.” Powell’s remarks came a day after the central bank painted a rosy picture of the U.S. economy, raised interest rates for a third time this year and stayed on track to continue with additional gradual hikes next year. The Fed chairman said the point of watching the yield curve was to gauge if monetary policy is too tight — relative the neutral rate that neither speeds up or slows down economic growth — and that “the risk in monetary policy is that you tighten too much.” An inverted yield curve, when short-term yields rise above the returns on longer-term bonds, is seen by many investors as a reliable early warning signal. It has has preceded every U.S. economic recession in the past 50 years. And while the U.S. Treasury yield curve has not inverted, it has flattened. In August, the 10-year maturity’s yield premium over 2-year notes shrank to the narrowest since 2007. Powell, asked about how he viewed the risks of another asset bubble, said vulnerabilities were moderate and household balance sheets in good shape. “Where we do see some buildup is asset prices are high, equity prices are high relative to their historical levels, not like a bubble, but high,” he said. “But we monitor everything. We don’t see high vulnerabilities but we are going to keep watching very carefully.”



Euro Drops as Italy Worries Simmer; Stocks Decline: Markets Wrap

A downbeat mood settled over markets on Tuesday, as fears surrounding the populist Italian government’s fiscal plans topped a list of reasons for caution. The euro dropped a fifth day, European stocks and U.S. futures followed Asian declines, while Treasuries and bunds advanced. The common currency touched the weakest in six weeks after the head of Italy’s lower house budget committee said the nation would have solved its fiscal problems with its own currency, and the leader of the European Commission warned of a Greek-style crisis. Reassurances that the country has no plans to ditch the euro did little to calm nerves, and Italian bonds extended a recent slump, while the region’s safer “core bonds” climbed. The Stoxx Europe 600 Index fell for only the second time in six days as equities in Italy declined. Amid the risk-off mood the dollar climbed against almost all its major peers and emerging-market assets dropped. The pound slumped as Brexit and the annual conference of the governing Conservative Party continued to dominate headlines. Earlier in Asia stocks in Hong Kong underperformed as traders returned from a long weekend, and equities also fell in Australia and South Korea. Japan was a bright spot as the Nikkei 225 Stock Average ticked up a day after closing at its highest since 1991. While a deal between the U.S. and Canada to revamp the Nafta trade deal with Mexico gave global risk appetite a boost at the start of the week, investor sentiment remains fragile amid a laundry list of threats to markets. Beyond Italy, Sino-American tensions are back in focus after the Chinese navy dispelled a U.S. missile destroyer from waters near South China Sea islands, in Beijing’s account of the incident. Meanwhile, political drama in Washington still swirls around President Donald Trump’s Supreme Court nominee, which may feed through to November congressional elections and affect the outlook for the administration’s agenda.


Italian Assets Suffer Fresh Blow as Borghi Evokes `Own Currency’

Italian assets were roiled yet again after a prominent euroskeptic said that the nation could resolve its debt problems with its own currency. The yield on the nation’s 10-year bonds approached the highest level in more than four years while stocks slumped to the lowest in 17 months after Claudio Borghi, head of the lower house budget committee, said that the euro was “not sufficient” to solve Italy’s fiscal issues. Though he played down his comments subsequently, the common currency declined. Borghi’s comments come at a time of intense vulnerability for Italian assets, which have been battered amid investor concern over the country’s proposed budget deficit of 2.4 percent for 2019. Plans by the populist coalition to boost spending to fulfill campaign pledges are fueling speculation over the sustainability of the nation’s debt load. “It has brought up these old Italexit fears which are weighing on the euro,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “This is what this whole issue is really about — whether there is a break up of the euro zone or not.”



Trump Clears Deck for China Trade War With New Nafta Deal

President Donald Trump looks to be preparing for a potentially protracted economic war with China by clearing the decks of disputes with America’s other trading competitors. In just the last few weeks, he’s struck a last-minute deal with Canada and Mexico, signed a trade agreement with South Korea and convinced Japan to begin bilateral economic negotiations. The North American accord also includes provisions seemingly aimed at keeping Chinese products out of the region. “Several months ago the U.S. had a multi-pronged attack on its trading partners,” said Dec Mullarkey, managing director for Sun Life Investment Management which oversees $47 billion in assets. “Now the U.S. can zero in on China.” That’s good news and bad news for the global economy. On the plus side, it suggests that Trump is not an ultra-isolationist who’s opposed to all types of trade. As economists from JPMorgan Chase & Co. see it, the president is holding back from launching a “war on trade” that could upend the world economy. But he is embarking on a trade war with China that will take a bite out of both countries’ economies next year and raise the risk of a broad pullback in global business confidence, they said in a Sept. 28 research note. “It’s too early to talk” with China, Trump said on Monday in announcing the new pact with Canada and Mexico at the White House. “Can’t talk now, because they’re not ready, because they’ve been ripping us for so many years. It doesn’t happen that quickly.” U.S. negotiators clearly had China in mind when they hammered out the new trade deal with Mexico and Canada to replace the 1994 North American Free Trade Agreement that Trump labeled a disaster. “A small but important part” of the pact is aimed at China, White House trade adviser Peter Navarro said on National Public Radio on Tuesday. The agreement’s rules of origin, which govern how much value of a car needs to be made in the region, have been touted by the Trump administration as a tool to keep out Chinese inputs and encourage production and investment in the U.S. and North America. “The U.S. seems focused on keeping Chinese imports from gaining real market share in the U.S.,” said Flavio Volpe, president of Canada’s Automotive Parts Manufacturer’s Association. “The blunt protectionist stick used by this administration may end up creating a coalition of major trading partners that will be difficult for Chinese carrots to compete with.”