The Daily Update - NAFTA 2.0...let the negotiations begin

Nafta talks are set to take centre stage in Washington tomorrow; where representatives from the US, Canada, and Mexico are expected to discuss the likes of: cutting the US’ trade deficit with Mexico, Canada’s wish to retain the ‘essential’ Chapter 19 panels, ‘rules of origin’, ‘Buying America’, climate talks, the digital revolution... amongst others. Some pretty high profile and strongly opinionated figures including Wilbur Ross and Bob Lighthizer will be pushing for both Canada and Mexico to increase their US imports, for example. Lighthizer, said back in June that he would like to see trade talks completed by the end of the year, assumed optimistic by many, meanwhile, Ross has said he expects deals to be agreed by early 2018. Many market commentators do not expect a completion of these talks until the end of 2018 / beginning of 2019. This gathering will be the first of a proposed seven.

It seems as though neither Canada, nor Mexico are prepared to be bullied by the US, as they have also arranged to send some tough negotiators to fight their cause. Yesterday, Canada’s Foreign Affairs Minister, Chrystia Freeland said that the North American nation will not accept ‘just any deal’. Freeland also said she would like to see the positive points of the current agreement upheld, adding that the negotiations should focus on modernising and progressing the pact, especially in terms of strengthening labour markets and protecting the environment. Although the road ahead could be somewhat ‘dramatic’, Freeland says she is ‘deeply optimistic about the final outcome.’

Fitch’s concerns over the impact on Mexico’s economy appear to have calmed; revising the country’s rating outlook from negative to stable BBB+. The rating agency stated: ‘The risk of a disruptive outcome from Nafta renegotiations for the Mexican economy has fallen recently, and we assume that an eventual deal is unlikely to seriously undermine Mexican access to the US market’. The rating agency went on to say that although current uncertainty could weigh on the country’s economy, ‘some aspects of renegotiation could present medium-term opportunities.’ No-one can be sure how the talks will evolve, however, Mexico’s economy has remained resilient to the stubbornly low oil prices and US protectionism steps, ‘and the authorities have demonstrated capacity to navigate these challenges’, Fitch added. S&P also revised Mexico’s outlook from negative to stable BBB+ last month citing the government’s ‘prompt reaction… to recent negative shocks… which diminish the recently rapid pace of debt accumulation and help stabilize the government’s debt burden’.

No doubt the initial talks between all parties will be watched closely, however, there is still a long way to go to get any comprehensive agreements in place. Recent trade rhetoric has, however, moderated from Trump’s previous comments - which were to effectively tear up the 23 year old Nafta pact and enforce tariffs on Mexico (and Canada) - to formalised discussions. The representatives from the three nations appear to be open to these discussions, but are also cautiously aware that they will be tested. US VP, Pence said Nafta 2.0 negotiations can end in a ‘win-win-win’.

With the auto sector another contentious area within the Nafta negotiations, we thought we’d end with US automaker, Tesla’s new USD 1.8bn 8-year bond deal. The bond, rated B3/B- by Moody’s and S&P, was issued at a spread of 320bps and yield of 5.3%. With the excitement surrounding the new Tesla Model 3 (roughly 455,000 cars remain on order), it was no surprise that there was such high demand for this bond; the issue size was upped from an initial offering of USD1.5bn. However, this is not an issue we would consider for our high-grade portfolios as we currently price this 5.3% 2025 bond at 3 notches expensive; as similar junk bonds trade around 275bps wider. We’d rather stick with our single A rated portfolios which have a weighted average yield around 4%.