Xi Jinping’s state visit to UAE has perhaps been overshadowed by media coverage of the Trump-Putin meetings in Helsinki earlier in the week: the visit is part of UAE-China week running from 17-24 July focusing on bilateral relations and enhancing the trading and cultural relationship between the countries. Importantly, we see the event as highlighting the importance of China’s Belt and Road Initiative (BRI) (also known as One Belt, One Road or OBOR) which also fits with a plan by Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi, to ‘Restore the Silk Road’ trading route.
Over the past week the term spread between 2-year and 10-year US Treasuries has averaged 25bps – equivalent to just one more Fed rate hike. Also earlier this week the 3-month Treasury bill yield touched 2% for the first time since 2008; this means that even short-term bonds now yield more than US stocks for the first time in a decade – becoming a viable alternative for those apprehensive about both stocks and bonds.
On Friday Fitch downgraded Turkey’s long-term credit rating by one notch, to BB, negative outlook; in-line with Moody's, and one notch above S&P’s BB- rating. We highlighted our concerns last month, ahead of the elections, as the economic fundamentals looked increasingly shaky and the lira collapsed; currently down 20.5% ytd. Also, inflation hit a 15-year high of 15.39% yoy in June off the back of the tumbling lira.
The real yield of investments is not so important over a shorter time horizon, however, the devaluation of the particular investment due to inflation, over time, really needs to be noted; historically it remains a good measure of value.
When you get to extremes and prolonged periods of fabricated adjustment - central banks call it the monetary tool box, the kick-back from the adjustment, the bounce back - the correction of the level of rates could be extreme.
On Friday, the rating agency Moody’s followed Fitch by raising Qatar’s outlook back to stable from negative, whilst reaffirming the long-term issuer and foreign-currency senior unsecured debt ratings at Aa3. According to a statement issued with the assessment Moody’s stated ‘Qatar can withstand the economic, financial, and diplomatic boycott by Saudi Arabia, the UAE, Bahrain, and Egypt in its current form, or with possible further restrictions, for an extended period of time without a material deterioration of the sovereign’s credit profile’, adding ‘This assessment is in part based on evidence of broad resilience of Qatar’s credit metrics to the economic and financial blockade over the past 13 months’.
The International Energy Agency’s (IEA) July report, released on Thursday, received some interest after the crude benchmark posted its biggest one day decline since September 2016 (on Wednesday) falling 6.9% to USD$73.40 at the close. News that some Libya supply was resuming and escalating US-China trade tensions have been a factors unsettling the market and on Tuesday the US announced it is looking to impose additional tariffs on USD200bn of Chinese imports.
It’s a quiet day in markets with US Core CPI a non-event coming in bang on forecast at 2.3% yoy. Headlines were focused on Trump’s travels and the latest NATO Summit where a “very happy” Trump held a press conference confirming he can now “believe in NATO” whose members have committed to “up spending [by] $33bn” with a commitment from a “very unified and much stronger” Alliance to swiftly meet the NATO 2% of GDP spending target. Agreeableness does not a dealmaker make.
In yesterday's daily, we discussed our thoughts on the recent escalation of a global trade war and the subsequent effects, we continue to pen our views:
The dangerous consequence of the US administration’s decision to embark on this course of action is that it could easily lead to another financial collapse and world leaders will need to think quickly about how to avert this.
In our two-part daily, we'll be discussing our thoughts on the Trump administration's tariffs:
Donald Trump’s decision to start a global trade war, and subsequent escalation by the US administration could become very damaging for the world economy. How this impacts the consumer can be seen through the recent decision by Tesla to raise prices in China in an effort to pass on the additional costs.
48 hours after the UK Prime Minister Theresa May secured cabinet approval for her proposal for a softer Brexit plan, Brexit Secretary Davis, his deputy Brexit Department Minister Steve Baker and Junior Brexit Minister Ms Suella Braverman all resigned. Davis described himself as a 'reluctant conscript' to Theresa May's leadership.
Overnight, US-Sino trade relations deteriorated further as the US confirmed USD34bn of tariffs on Chinese imports came into effect. China stated that it has been forced to retaliate and imposed countermeasures. We view the continued deterioration in the trade environment as a negative risk to global growth.
For the first time in many years, tomorrow’s Non-Farm Payrolls, thought to come in at around +195k, is taking second stage as the next wave of Trump tariffs on Chinese imports is due to be imposed. Broadly, a tariff of 25% on $34bn of China’s exports to the US tomorrow with a further $16bn to come at a non-specified later date. China have already responded saying it would retaliate ‘equal scale, equal intensity’ targeting food products such as soybeans and rice but also autos in the first round.
As we mentioned, in yesterday’s daily, we expect Chinese government bonds will SIGNIFICANTLY outperform as the internationalisation of the renminbi continues.
So, the fact that investors will hold more renminbi in the future is a close to a certainty as one can get in the uncertain global financial markets; the only real debate is how these holdings will eventually come about.
Last week we put a piece out on the Bond Connect, and today marks the first year anniversary since its launch.
Foreign institutions who can access Chinese Government bonds via Bond Connect now total around 315; although the aggregate amount still represents less than 2% of the Chinese bond market. Those numbers are, however, growing rapidly and will likely accelerate further once UCITS funds are given approval.
As we mentioned on Friday, it was indeed third time lucky for Andrés Manuel López Obrador’s (AMLO) as he won a landslide victory in yesterday’s Mexican Presidential Election. Figures suggest that AMLO could have won over 53% of the vote, well above what the polls were indicating beforehand. In contrast, the leader of a right-left coalition Ricardo Anaya, polled about 22%, with centrist candidate José Antonio Meade taking approximately 16%, both well below what was being suggested by the polls.
Mexico’s tide of political fortune certainly looks to be in Andrés Manuel López Obrador’s (aka AMLO’s) favour as the country heads to the polls on 1 July for the Presidential Election. This is the third time that the hard-left candidate AMLO has run for President but this time his campaign looks to have gained sufficient traction with the voters to put him in poll position. More recent polls such as Consulta Mitofsky (excluding non-respondents) show AMLO ahead by a considerable margin at 48.1% of the vote.
The 3rd of July 2017 marked the launch of Bond Connect, which in years to come will probably be remembered as a watershed moment along the path of internationalisation of the renminbi. If looked at narrowly, the significance of Bond Connect can sometimes be overlooked, so as we approach the first anniversary of it’s launch, we revisit the scheme and the implications for financial markets in China, and the longer term impact on the global financial system.
Stocks have continued their 2-3 week sell-off (since June 11th) with the S&P and Dow down more than -2% and -4% respectively, US Treasury 10-year yields have today fallen below 2.85% (from above 3% earlier in the month) as have 30-year yields from 3.15% to 3% – after a strong auction yesterday demonstrated support at these levels. Meanwhile, Bloomberg splattered their front page with “Hedge Fund Managers See Echo of Past Crashes in Markets” with the likes of Greg Coffey calling, “The ghosts of 2000 are upon us”.
“Protectionism” and “Trade-Wars” have been some of the most commonly used phrases across newswires this year, with no signs of concerns abating anytime soon as Mr Trump marches ahead with his aggressive trade and investment policies. Just what he will achieve is completely unknown, but what we do know is that trade wars and protectionism are never a good thing for any nation, and are the greatest threat to global growth.
The President of Turkey, and leader of ruling Justice and Development Party (AKP), Recep Tayyip Erdogan has won the highly charged election that will allow him to govern for the next 5 years. The win will allow him to introduce sweeping new powers, which some, opposition included, are seen as a ‘blatant power grab’. Under the new system, the president is permitted wide-ranging executive authority, curtailing parliament's powers, as well as the office of prime minister being abolished. With 99 percent of the votes counted, Erdogan has 53 percent of the vote, with his closest rival, Republican People’s Party or CHP, trailing with 31 percent of the vote. With around 59mln people eligible to vote, it is claimed the participation rate was an astonishing 90%.