The US government is said to be considering proposing tariffs on goods from those countries it deems to have undervalued their currencies in order to get the upper hand when exporting to the US. The idea of countries manipulating their currencies is nothing new, Trump has long accused China of such things, in a roundabout way, however, his administration has been looking at how to take a more aggressive approach to the situation. The US Commerce Department said its proposed rule change would amend the normal countervailing duty process to include new criteria for currency undervaluation.
The 30 April/1May FOMC meeting minutes were released overnight. Despite them coming from a meeting held days before the latest escalation in US-China trade tensions the market still billed them as one of the key focal points hoping perhaps for a glimmer of insight or support for current market expectations: ahead of the release the Fed Futures was predicting ~70% chance of a rate cut before the end of the year.
May just never seems to be Theresa May’s month, in a strain against nominative determinism. As Brexit fears crescendo again in the approach to European Parliament elections – and as sterling falls 4 pence from ~1.31 to 1.27 – yesterday Prime Minister May daringly offered MPs a vote on a second referendum to go alongside her revised deal. Tim Shipman, political editor for the Sunday Times, tweeted that “Theresa May’s speech sounds like a kidnap victim reading out the demands of her captors”.
Adidas, along with Nike and other US footwear giants have signed an open letter to US President Trump urging him to reconsider his policy of trade tariffs against China, which the industry believes would have a devastating effect on its market. In all, 173 companies have signed the open letter, which as well as being posted on the industry trade association's website, was also sent to Larry Kudlow, director of the National Economic Council, Steve Mnuchin, the Treasury Secretary, and Wilbur Ross, the Commerce Secretary.
During our selection process one of the most important factors of selecting a bond, aside from the country's Net Foreign Asset (NFA) position, is the risk-adjusted return; we use the expected return and yield, and notch protection as two of the main identifiers. Although we do not typically invest in sub-investment grade bonds across our portfolios, we do still monitor them; especially as we can hold junk bonds in one of our funds.
Provisional estimates from the CDC on US births and fertility highlights the demographic challenges facing the US. The number of births declined 2% in 2018 to 3.788m, the fourth year in a row of decline and the lowest level for the past 32 years. The general fertility rate also hit a low falling 2% from 2017 to 59 births per 1,000 women aged 15-44 reflecting a decline in birth rates for women under 35.
The Chinese Yuan, the offshore currency known as CNH, is now trading at a spot rate of 6.9140 to the US dollar, a fall of around 2.6% this month on the back of the trade frictions with the US. The market is full of speculation as to the view of the Chinese authorities about the outlook for the currency unit with many observers speculating that they are trying to weaken the currency to offset the tariffs imposed by the Trump administration.
Yesterday the US government announced that it would be moving forward with plans on tariffs against the EU over what it believes are illegal subsidies the Union give Airbus. Trump has repeatedly complained about the subsidies he believes Airbus gets, plus the trade imbalance with the EU, which reportedly reached USD622bn last year. The U.S. Trade Representative's Office (USTR) said yesterday ‘The WTO has found repeatedly that EU subsidies to Airbus have caused adverse effects to the United States, adding ‘USTR estimates the EU subsidies cause approximately $11 billion of harm in trade to the United States per year.
After a delay, which is unusual, China responded last night to the US tariff proposal of last week with up to $60bln of imports with a 25% tariff which covers around 2500 US export items effective June 1st.
Strangely, the Chinese retaliation announcement came just 30 minutes after President Trump had tweeted a warning for China not to retaliate. He also said he still had not made a decision on adding additional tariffs to a further $325bln of Chinese goods and said he will meet with the Chinese leader in Japan next month at the G20 summit. In fact US Secretary Mnuchin said trade talks are continuing.
Donald Trump on Friday said that trade talks between the US and China would continue into the future, with tariffs and the proposed increase in them, being removed or not, all dependent on the outcome of the negotiations. Trump tweeted ‘We are right where we want to be with China. Remember, they broke the deal with us & tried to renegotiate. We will be taking in Tens of Billions of Dollars in Tariffs from China. Buyers of product can make it themselves in the USA (ideal), or buy it from non-Tariffed countries...’
Following the US announcement that tariffs on $200bn of Chinese imports would increase to 25% as of Friday markets broadly traded with a risk-off bias into Thursday’s close. Unsurprisingly, China warned of ‘necessary countermeasures’ if the US went ahead with the intended tariff increases. A further round of trade negotiations did take place between the Chinese and US in Washington on Thursday with Chinese Vice-Premier Liu He heading up the Chinese delegation.
In Japan, which some observers think as an image of Europe in twenty years’ time, the Bank of Japan (BoJ), is considering lengthening their forward guidance on forward rates beyond Spring 2020. Concern has been reflected due to the lack of growth through the first quarter as exports and industrial production, the big sustainable engines of growth, remained weak due to a slowing in the global economy and a sluggish China.
93% of stocks in the S&P 500 closed lower yesterday as market optimism over the US-China trade deal eroded. On Monday, Robert Lighthizer, US Trade Representative, warned of a recent “erosion in commitments by China”, clearly stating that as things stand tariffs on Chinese imports would rise from 10% to 25% this Friday. The tariff news was reiterated by President Trump in a string of tweets, not only warning of impending 25% tariffs on the current $200 billion, but broadening the levy to over half a trillion dollars in Chinese goods with a further $325 billion in tariffs.
In the Fed’s latest semi-annual Financial Stability Report, it has again warned that companies with already large amounts of debt are continuing to borrow at a breakneck pace, prompting fears that if the trend continues there could be a risk to the financial system. The warning mirrors that of the one issued in November, however, now the report stated a record 40% of loans to the most highly indebted companies went to those who are the most indebted of all.
Back in early April, we wrote about President Trump’s attempts to sway the independence of the Federal Reserve Open Market Committee, FOMC, by promoting two candidates to the vacant Board of Governors positions who were both calling for immediate rate cuts.
Herman Cain fell away early after some senators made it known they would not back the appointment noting claims of his politicised approach to monetary policy and past allegations of sexual misconduct.
As expected, the FOMC left the Fed Funds target range unchanged at 2.25-2.5% and stuck with its ‘patient’ approach. Given the recent soft PCE data the Fed’s view on inflation was a key focus. The FOMC statement acknowledged a softening in the inflationary backdrop stating ‘On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.’ However, Jerome Powell’s comments in the press conference sent a cautionary warning to the market doves.
So far there have only really been three of them in the US: first Apple in August 2018, then Amazon in the following month, and last to join the trillion dollar club was Microsoft just in this past week. In the turbulent period since Apple’s landmark accomplishment valuations had pushed highs of $1.1tn and bottomed below $0.7tn (as with Amazon). But the ~30% rally so far this year finally pushed Microsoft over the line and brought the other two tech giants back within 5% (a mere 50 billion dollars) of that twelve-zeros stature – so only meet the mark on a good day with the benefit of a rounding error.
hat Japan’s population is ageing will not come as a surprise to anyone. Having peaked in October 2010 at a fraction over 128 million, since then Japan’s population has been shrinking at the rate of around 200 thousand per annum. However, this seemingly modest decline masks a much bigger shift which lies beneath the surface.
Japan’s birth rate currently stands at 1.43 children per woman which is well below the 2.07 births estimated to be the level required to keep the population stable.
The IMF’s managing director, Christine Lagarde, used a speech in China to warn Chinese President Xi Jinping against letting China’s belt and road initiative build up unsustainable debt that could be problematic for participants in the future. She also warned that China should be very aware of the environmental cost of the initiative, urging that the whole project should be based on sustainable development.
If Carlsberg did paired trades….
Looking through the RVM (our “Relative Value Matrix”) the other day, I hit the “sort by credit notches” by ascending order by mistake. Thinking back to our “long / short” days (something we may well yet look to revisit once again) I wanted to highlight a fictitious paired trade for your amusement.