September 30, 2019
Wall Street Warns Against Bets on October U.S.-China Truce
“The next round of U.S. tariff hikes on China is little more than two weeks away, though equity and foreign-exchange markets aren’t signaling any obvious concern. That may set things off to a rocky start in the fourth quarter, a period when thinning liquidity is perceived to increase the risk of volatility. For their part, strategists at some of Wall Street’s biggest banks — including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc. — warn against expecting any truce in the upcoming round of U.S.-China trade talks. “We have more conviction that, without a circuit breaker, escalation continues over the medium term, meaning any pause is fleeting,” Morgan Stanley strategists including Michael Zezas wrote in a note to clients Monday. “Investors should price in all announced actions (i.e., tariffs on both Oct. 15 and Dec. 15) even if further delays or pauses are announced.” While news about Trump administration deliberations on curbs on U.S. investments in Chinese companies hit stocks Friday, S&P 500 futures and the yuan both rose in Asian trading Monday. That’s after China confirmed that its top trade negotiator, Vice Premier Liu He, is still heading to the U.S. for negotiations after national holidays end Oct. 7. Yet the Morgan Stanley team highlighted that rounds of top-negotiator talks lately have been followed by tariff escalation, not by an easing in tensions. Indeed, President Donald Trump on Aug. 1 announced a new round of tariff hikes shortly after the principal U.S. negotiators returned from talks in Shanghai. And that triggered the worst month for global stocks since May — when investors were also handed with an escalation in tariffs. In currencies, the yuan slid through 7 per dollar, for a time spooking investors across emerging markets. September saw both stocks and exchange rates settle, as the U.S. and China announced goodwill gestures that took tensions down somewhat.”
U.K. Households Have Comfortable Savings Margin to Handle Brexit
“Fears that British consumers could be forced to slash their spending in a disruptive Brexit were partially allayed by new figures showing households are saving a larger proportion of their disposable income than previously thought. The saving ratio rose to 6.8% between April and June, and averaged more than 6% over the previous four quarters — two percentage points higher than last estimated. Samuel Tombs at Pantheon Macroeconomics in London said the figures highlighted “the scope to absorb future income shocks without cutting spending.” The latest GDP data Monday painted a generally positive picture of British households, which have kept the economy growing though the turmoil since the 2016 Brexit referendum. Consumer spending rose 0.4% in the second quarter as wage growth outstripped inflation, helping to offset another fall in business investment. Revisions also reveal that households were net lenders over the past two years, receiving more income than they spent and invested. They were previously estimated to be net borrowers. The ONS said the revisions largely reflected the fact that people have been donating less to charity than previously thought and receiving more money from renting their homes. Changes to the accounting treatment of student loans also mean less money is being lent to households by the government. The economy is also starting to get support from the easing of austerity. Government spending rose at the fastest annual pace since 2008 in the last quarter, with higher spending in the National Health Service accounting for much of the increase.”
China Vows to Continue Opening Financial Markets
“China said it would continue to open up its financial markets and encourage foreign investment amid reports the Trump administration is considering restrictions on fund flows to China. “We will take further steps to promote high-quality, two-way financial opening and encourage foreign financial institutions and funds to invest in the domestic financial market to boost the competitiveness and dynamism of the domestic financial system,” according to a summary from the eighth meeting of the Financial Stability and Development Committee posted on its website Sunday. The world’s two largest economies are heading into another round of high-level trade talks following China’s week-long national holidays starting Oct. 1. A U.S. crackdown on capital flows would present a new pressure point in the economic dispute, and could cause disruptions well beyond the tariffs on hundreds of billions of dollars worth of products the two sides have levied against each other. “Chinese efforts to enhance reform and opening will be slowed down in the short term, but they will never be stopped,” said Liao Qun, Hong Kong-based chief economist with China Citic Bank International Ltd. “China could explore European, Southeast Asian and the Belt and Road markets in lieu of the U.S.” ”
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