Authored by Mike Shedlock via MishTalk, US steel and aluminum tariffs start Friday. Germany's economy minister is in D.C. But Trump has stringent demands. No one wins trade wars. The notion is ludicrous. I have more on the "meaning of win" in a moment. But first let's consider the Eurointelligence view. This is not a trade war the EU can ever win, as Wolfgang Munchau points out in his FT column. If the EU were to put up a big fight over this, with a long list of sanctions on Friday, the US would immediately respond with a tariff on car imports. It would be the equivalent of the Fool's Mate in chess, Munchau argues. Donald Trump is right in his assertion that trade wars are easy to win - if your opponent is sufficiently desperate and addicted to the export of manufactured goods, like Germany is. When we said that a current account surplus of 8% (or probably higher) is not sustainable, it was not meant as a statement of right or wrong. Unsustainable means that it will end at some point - through either adjustment or force. Spiegel magazine had a story over the weekend that there is a glimmer of hope. It was one of those short Spiegel news stories, something they picked up from a single source, but not quite worthy of a full-length article. The story says the US will make three specific demands as a pre-condition for exempting the EU from the steel and aluminium tariffs. The first is that the EU caps steel output at 2017 levels. The story did not reveal the metric, whether in volume or value. The second is that the EU take anti-dumping measures against China, and agrees to cooperate with the US in questions of international trade policy. And, to top it all, the Europeans will have to deliver proof that they are on the way to meeting their Nato commitments on defence spending. The latter is an impossible demand to meet since no such proof can exist. The German grand coalition, for example, is making no efforts to increase defence spending. The priority of the new finance minister, Olaf Scholz, is to maintain the fiscal surplus. OK, Where's the Win? Eurointelligence never explained how this magical "win" occurs. Instead, Eurointelligence linked to a report by Brad Setser: Forming an Alliance With U.S. Allies Against Bad Chinese Trade Practices Won’t Be Enough to Bring the Trade Deficit Down. There are growing calls for a global coalition of U.S. allies to pressure China to change some of its most egregious commercial practices. That makes some sense [Mish - actually it makes zero sense - explained later], even if it is much easier said than done. It is relatively simply to get agreement that China should change many of its policies. But China doesn’t typically respond to peer pressure alone. It is relatively hard to get agreement on what to do if China doesn’t change voluntarily. After a useless diversion into complaints about China, Setser admits this interesting tidbit: China’s current account surplus is well below that of the Eurozone. Or that of Japan. [Mish - It's simply high with the US]. Even at 2.5 percent of China’s GDP, it is smaller, relative to China’s GDP than the current account surpluses of the United States’ security allies. U.S. allies generally have much tighter fiscal policies than China. That’s a big reason why they run larger current account surpluses than China. [Mish - Not really - the reason is that Nixon closed the gold window and this is the logical result.] Korea and Taiwan (and neutral Switzerland) also put their finger on the foreign exchange market when needed to keep their currencies weak (Korea rather egregiously in January). As a result, the combined current account surplus of U.S. allies in Europe and Asia is close to $800 billion—well over China’s roughly $200 billion. That sum would be a bit bigger if you added in the surplus of democratic but formally non-aligned European countries like Sweden and Switzerland. A China that behaved better commercially would no doubt help many companies. And if China lowered barriers to actual imports, overall trade with China might expand. But better commercial practices on their own aren’t enough to assure a smaller Chinese trade surplus. [Mish - On that I strongly agree with Setser] So long as Asia and Europe’s aggregate surplus remains high, someone in the world will still need to run a large external deficit, and odds are that will still be the United States. [Mish - Once again this is a mathematical necessity!] In Dollar Terms See the Problem? The US has its biggest trade deficit with China, but globally the imbalance is with Germany and Japan. Placing tariffs in Chinese steel will so nothing but make the US more uncompetitive on exports. Averting a Trade War To stave off the trade war, assuming Trump sticks to his guns, the EU needs to do these three things. EU caps steel output at 2017 levels. EU takes anti-dumping measures against China, and agrees to cooperate with the US in questions of international trade policy. EU must deliver proof that they are on the way to meeting their Nato commitments on defence spending. If not, we have a trade war. Easy to Win Wolfgang Munchau say In a Trade War Germany is the Weakest Link and "If your target is Germany, then yes, a trade war is easy to win." Munchau bases his opinion on the idea that the EU, Germany in particular, is very dependent on exporting cars at a time when Germany's diesel technology is on the verge of being worthless. Brexit poses an additional threat as Germany is a huge net exporter to the UK. Here's Munchau' conclusion: "This trade war is indeed easy to win. It is going to be the equivalent of the fool’s mate in chess: the game could all be over in two moves." Meaning of Win What does it mean to "win" a trade war? Donald Boudreaux at the Cafe Hayek explains in his post: An Oxymoron to Beat All Oxymorons. No two human activities are as opposite one another as are trade and war. Trade is voluntary; war is coercive. Trade is peaceful; war is violent. Trade enriches; war impoverishes. Trade is a mutually advantageous exchange of property rights; war is a bilateral destruction and confiscation of property rights – destruction and confiscation that never are mutually advantageous and that too often, in the end, are advantageous to no one. When trading, each party improves his welfare only by attending to, and enhancing, the welfare of others; when warring, each party improves his welfare only by attacking, and diminishing, the welfare of others. Those who trade with each other have an interest in each other’s well-being; those who war against each other have an interest in each other’s annihilation. Trade enhances life; war ends life. What are called “trade wars” are indeed wars, but they involve only war and no trade. Every so-called “trade war” is each government making war on its own citizens, coercing them not to trade as they would otherwise peacefully trade. The term “trade war” makes no more sense than do the terms “good evil” or “peaceful violence.” We should stop using it. We must find a better term to describe governments’ waging war upon those of their own citizens who dare to trade with others. Curious Way to Win As Munchau, Trump, and Peter Navarro (Trump's trade guru) see things, it is remarkably easy for Trump to win. In reality, the only way to win is to not play the game at all. Please reflect on this: Shall we play a game?
After yesterday's violent selloff which was sparked by a series of negative tech stories including Facebook’s escalating data scandal and a fatal accident involving an Uber self-driving car, Tuesday trading has so far been relatively calm and muted with Europe bourses paring early gains and Asian stocks trading slightly lower... ... while S&P futures were hugging the unchanged line as Nasdaq futures pointed to more tech declines. The tech dump, which took place one day after we noted that "FANG + Apple Now Account For A Quarter Of The Nasdaq, And Some Are Getting Worried" is prompting even more fears among investors that the glory days of the tech momentum trade are over. "There certainly are some stocks where valuations look somewhat stretched ... so we’re focusing our exposure within the technology sector on the cheaper end of the market,” said Mike Bell, global market strategist at JPM Asset Management. "We’re a bit more cautious on the more expensive and some of the more popular names in the sector." Gains are also muted as investors braced for new Federal Reserve Chairman Jerome Powell’s first policy meeting starting later in the day and amid concerns that U.S. President Donald Trump could impose additional protectionist trade measures. “Investors lightened their positions ahead of the Fed’s policy meeting. The markets are completely split on whether the Fed will project three rate hikes this year or four,” said Hiroaki Mino, senior strategist at Mizuho Securities. Following the tech selloff and with a Fed rate hike imminent, bullish sentiment appears scarce. Compounding concerns was a late Monday report that the White House plans to impose $60BN in tariffs on Chinese products as part of a battle over safeguarding intellectual property. It would be the latest phase of President Donald Trump’s protectionist agenda, and threatens to increase market fears of a trade war. Underscoring the lack of an upside case, Morgan Stanley's chief equity strategist suggested that the highs of the year have already been seen. Looking at regional markets, European shares eked modest gains as investors awaited Fed Chair Jay Powell's first meeting as the Federal Reserve’s new chairman while eyeing Facebook headlines. The Stoxx 600 Index gained 0.2%, after dropping the most in two weeks on Monday. Sectors are broadly in the red, with the exception of materials which has been supported after Rio Tinto (+0.6%) announced the sale of its Hail Creek and Valeria units in a USD 1.7bln deal with Glencore. Earlier in Asia, stocks traded lower across the board following on bearish momentum from the US. Australia's ASX 200 (-0.4%) was weaker with miners pressured in Australia as Dalian iron ore futures extended on losses due to rising inventories, while Nikkei 225 (-0.5%) underperformed despite a weaker currency. Elsewhere, Hang Seng (+0.1%) & Shanghai Comp. (+0.3%) were subdued for a bulk of the session although the Shanghai Composite pushed back into positive territory in the latter stages of trade, after the PBoC skipped liquidity operations and amid trade war concerns with US President Trump said to be preparing a $60BN package of tariffs for China. In FX, the USD slowly strengthened across G-10 and EMFX, while the pound was a notable mover, erasing early gains after U.K. inflation missed expectations, leaving the currency defending Monday’s advance as progress in the Brexit talks turns focus to Thursday’s BOE decision where Carney is expected to set the stage for a May rate hike. The dollar fluctuated amid lack of U.S. economic data before edging higher, while the yen whipsawed. The Japanese yen was pushed lower after Japan’s Trade Minister said the nation is likely to get exemptions to U.S. tariffs, only to whipsaw higher later after comments from Deputy Governor Amamiya hit that the BOJ may adjust rates before the inflation target is hit (very unlikely). Separately, deputy governor Wakatabe stated that the BOJ will not hesitate to ease further if necessary, but any changes must not be premature. He also believes it is possible for monetary policy to be updated. Below are the key FX moves from Bloomberg: Sterling erased its advance after data showed U.K. inflation slowed more than forecast in February, but the currency stayed above 1.40; GBP/USD little changed 1.4024, holding its 0.6% advance in the past two days; it strengthened 0.1% to 87.84 pence per euro The Bloomberg Dollar Spot Index gains 0.2% as markets await Wednesday’s Fed policy decision; Treasuries dip with the 10-year yield rising to 2.87% The yen pared an earlier decline after remarks from BOJ’s Amamiya that while there was no current need to hike rates, it is something they wouldn’t rule out; USD/JPY climbs 0.3% to 106.41, having earlier touched 106.61 The euro reversed early gains to trade 0.2% lower at 1.2307 amid light volumes While long-term U.S. bond yields were muted, short-dated yields rose ahead of an expected rate hike from the U.S. Federal Reserve after its two-day policy meeting starting on Tuesday. The yield on 10-year Treasuries was little changed at 2.857%, 10 basis points below the four-year high of 2.957% touched a month ago. But the yield on two-year notes hit a 9 1/2-year high of 2.32% on Monday as the Fed appears set to bump up its policy interest rates to 1.50-1.75 percent from the current 1.25-1.50 percent. Still, with a Fed rate rise already fully priced in, the dollar barely gained from the prospect of a rate hike. In geopolitical news, US and South Korea agreed to resume joint military exercises on April 1st following the postponement due to Winter Olympics, while North Korea has been notified of the schedule for the drills. In the US, Saudi Crown Prince Bin Salman and US President Trump will discuss Iran nuclear deal this Tuesday, according to a senior administration official. In commodities, WTI and Brent remain in close proximity to yesterday’s highs which were seen after reports that the US was exploring sanctions on Venezuelan oil. Elsewhere, energy newsflow remains light with markets now awaiting the latest API report. In metals markets, gold is sat in negative territory albeit modestly so alongside the slightly firmer USD. Elsewhere, Chinese iron ore continued its decline overnight after yesterday’s slump as mounting inventories and soft domestic demand hampers prices while copper was also lacklustre amid the risk-averse tone. No major economic data is expected. FedEx is among companies set to report earnings. Bulletin Headline Summary From RanSquawk European equities sit in modest positive territory in what has been a relatively choppy session thus far BoJ Deputy Governor (Amamiya) suggested that rates could be adjusted before inflation reaches the 2% target Looking ahead, today sees a lack of tier 1 highlights Top Overnight News from Bloomberg Trump may plan to impose $60b in annual tariffs against China by Friday, double what senior aides had proposed, Washington Post reports, citing people familiar German Mar. ZEW Expectations: 5.1 vs 13.0 est; Current Situation 90.7 vs 90.0 est. U.K Feb. CPI y/y: 2.7% vs 2.8% est; Core CPI 2.4% vs 2.5% est, ONS cites base effects of GBP depreciation starting to fall out of the calculation BOJ’s Amamiya: does not rule out the BOJ adjusting rates before inflation hits 2%; however no need to consider a rate hike now China made further promises to protect the intellectual property of foreigners investing in its economy, addressing a long- standing U.S. grievance as President Donald Trump plans new tariffs aimed at Beijing Japan will keep pressing for exemptions from U.S. tariffs and it’s highly likely that it will secure them for specific goods, Japanese Trade Minister Hiroshige Seko said at a press conference in Tokyo on Tuesday The EU will consider offering the U.K. “improved equivalence” for financial services after Brexit, according to the bloc’s latest negotiating guidelines, a system Britain has rejected as “wholly inadequate” The broad transition deal announced on Monday might be too late to stop some of the Brexit fallout: nearly one in seven EU companies with U.K. suppliers have moved some of their business out of Britain, according to the Chartered Institute of Procurement & Supply. Ministers of the bloc are set to sign off to EU Summit conclusions, post-Brexit relationship negotiating guidelines later Tuesday Facebook Inc. has failed to contain the fallout from the Cambridge Analytica revelations as the company’s efforts to get ahead of the media firestorm backfired Norwegian krone pares Monday’s drop after Justice Minister Sylvi Listhaug resigned to avert a government crisis ahead of a no-confidence vote in parliament Market Snapshot S&P 500 futures up 0.06% to 2,724.50 STOXX Europe 600 up 0.2% to 374.44 MXAP down 0.2% to 176.54 MXAPJ up 0.08% to 583.57 Nikkei down 0.5% to 21,380.97 Topix down 0.2% to 1,716.29 Hang Seng Index up 0.1% to 31,549.93 Shanghai Composite up 0.4% to 3,290.64 Sensex up 0.1% to 32,958.29 Australia S&P/ASX 200 down 0.4% to 5,936.38 Kospi up 0.4% to 2,485.52 German 10Y yield rose 1.2 bps to 0.581% Euro up 0.02% to $1.2338 Brent Futures up 0.8% to $66.55/bbl Italian 10Y yield fell 1.8 bps to 1.708% Spanish 10Y yield fell 1.5 bps to 1.326% Brent Futures up 0.8% to $66.55/bbl Gold spot down 0.2% to $1,314.31 U.S. Dollar Index up 0.2% to 89.92 Asian stocks traded lower across the board amid a spill-over effect from Wall St where all majors saw firm losses heading into the week’s key risk events and amid a sell-off in tech led by Facebook on reports of data breaches. ASX 200 (-0.4%) was weaker with miners pressured in Australia as Dalian iron ore futures extended on losses due to rising inventories, while Nikkei 225 (-0.5%) underperformed despite a weaker currency. Elsewhere, Hang Seng (+0.1%) & Shanghai Comp. (+0.3%) were subdued for a bulk of the session (Shanghai Comp. ebbed back into positive territory in the latter stages of trade) after the PBoC skipped liquidity operations and amid trade war concerns with US President Trump said to be preparing a USD 60bln package of tariffs for China. Finally, 10yr JGBs were lacklustre alongside subdued trade in T-note futures during Asia hours, and with price action also restricted amid an enhanced liquidity auction for long to super-long bonds which saw a lower b/c then prior. Top Asian News U.S. Is Said to Plan Heavy China Tariff Hit as Soon as This Week China Pledges Action on Tech Transfer as Trump Plans Tariff Hit European stocks have seen a choppy session thus far (Eurostoxx 50 +0.2%) following a softer US and Asia-Pac session. Sectors are broadly in the red, with the exception of materials which has been supported after Rio Tinto (+0.6%) announced the sale of its Hail Creek and Valeria units in a USD 1.7bln deal with Glencore. The media-sector initially outperformed at the open after the world's third-largest advertising group Publicis (-0.5%) reported its latest strategy action, before Co. shares were dragged lower as markets continued to digest the update. Elsewhere, banks are showing mild gains across the region lifting financials, ahead of tomorrow's widely expected Fed rate hike. Top European News U.K. Will Be Colder Than Normal in April, Weather Co. Says Crisis Ends as Norway’s Listhaug Resigns Claiming ‘Witch Hunt’ EU Offers U.K. ‘Improved Equivalence’ for Financial Services Glencore Buys Rio’s Stake in Hail Creek, Valeria for $1.7B Cash In FX, the Jpy extended overnight losses amidst what seemed to be a stop-driven run in early European trade, with Usd/Jpy up through 106.50 and its 20 DMA (106.50-55) to circa 106.60 at one stage, while Eur/Jpy spiked to around 131.70 as the single currency retains a bid in its own right on hawkish ECB source reports. However, recent comments from one of the new BoJ Deputy Governor’s (Amamiya) suggesting that rates could be adjusted before inflation reaches the 2% target has prompted some Jpy demand/short covering. Meanwhile, Eur/Usd has rallied further above 1.2300, reaching 1.2355 at best and eyeing offers at 1.2360 next, while bids are seen in the 1.2330-20 area, but in terms of the G20 arena overall, Sterling remains the top performer after yesterday’s UK-EU Brexit transition deal and despite weaker than expected UK inflation data almost across the board that only sparked a knee-jerk Pound sell-off. Cable is back to mid-range between 1.4067-20 parameters and Eur/Gbp still sub-0.8800 as attention switches to the latest labour/wage update on Wednesday and then the BoE on Thursday. At the opposite end of the spectrum the Aud and Nzd remain laggards with the former not helped by very neutral, still in wait and see mode RBA minutes or a further dump in iron ore prices and around 0.7700 vs the Usd, while the Kiwi is just keeping its head above 0.7200 vs the Greenback awaiting the RBNZ. Conversely, Usd/Cad is attempting to retrace a bit further below 1.3100 on better NAFTA vibes. In commodities, WTI and Brent crude futures remain in close proximity to yesterday’s highs which were seen after reports that the US was exploring sanctions on Venezuelan oil. Elsewhere, energy newsflow remains light with markets now awaiting the latest API report. In metals markets, gold is sat in negative territory albeit modestly so alongside the slightly firmer USD. Elsewhere, Chinese iron ore continued its decline overnight after yesterday’s slump as mounting inventories and soft domestic demand hampers prices while copper was also lacklustre amid the risk-averse tone. US Event Calendar Nothing major scheduled DB's Jim Reid concludes the overnight wrap A bit like this nasty cold spell in the UK, markets received a fairly rude awakening yesterday as a freefalling tech sector spread collateral damage across most risk assets. Much of the blame was placed at the hands of Facebook with the stock plummeting -6.77% for the biggest one-day fall since March 2014. This followed the news that a political advertising company had retained information on 50 million of its users without consent. In addition, the Apple news concerning efforts to develop its own screens and a European Commission proposal suggesting that large digital companies operating in the EU could face a 3% tax on their gross revenues also added to the pain for the sector. Indeed a broad measure of large tech stocks including the FAANG names fell -2.90% yesterday for the biggest decline since February 8th while the Nasdaq tumbled -1.84%, also the biggest drop in over 5 weeks. That tech tantrum seemed to ricochet across other markets with the likes of the S&P 500 (-1.42%) down for the fifth time in the last six sessions, and the Stoxx 600 (-1.07%) and DAX (-1.39%) also down prior to this in Europe. The VIX also spiked above 20 at one stage before paring back at the close to finish just above 19, albeit up 3pts from Friday. Credit indices weren’t immune either with CDX IG and iTraxx Main about 1.5bps wider while 10y Treasuries rallied nearly 5bps fromearly highs and Gold was up about +0.70% from the lows as safe havens were quick to outperform. So some decent moves. Yesterday might well be an isolated case but it fits in with our view that we are likely to see more tantrums in markets this year, certainly relative to the incredible calm that was 2017. Indeed, it’s fairly amazing that the S&P 500 has now seen 16 days of plus or minus 1% moves in either direction since the start of February, which compares to only 10 occasions through the 13 months ending in January. This morning in Asia it’s been more of the same with bourses broadly lower across the board, although moves are slightly more modest, with the Nikkei (-0.66%), Hang Seng (-0.49%), ASX 200 (-0.39%) and Kospi (-0.02%) all down as we type. Speaking at the conclusion of the NPC, China’s Premier Li noted that China “will further reduce the overall tax level for imported goods”, particularly on consumer products and will pursue a further opening up in sectors such as pensions, financial services and manufacturing. Li addressed the trade war debate by saying that “there’s no winner in a trade war, and war is going against the rules of trade”. In other news, away from markets there was better news to come from the latest Brexit developments with the UK and EU agreeing to the terms around a 21- month transition period. This will kick in at the Brexit date of 30th March 2019, or 376 days for those counting down the days. The biggest news to come from yesterday’s announcement though was that in reaching the transition the UK also agreed to the principle of the EU’s backstop solution for Northern Ireland post Brexit. As DB’s Oliver Harvey noted yesterday, this is a bigger surprise, and while details have yet to be agreed, enhances the credibility of yesterday’s deal. This implied that the UK has backed down from PM May’s initial stance. David Davis confirmed in the press conference that the UK’s preferred solution to the Northern Ireland border remains a close enough future UK/EU relationship that no hard border is needed, or technological solutions. However, that doesn’t take away from the fact that the agreement is a positive and unless there is a huge walk back, we should get official signoff at this week’s EU Council on Thursday and Friday, where the EU will also formally release guidelines for negotiations on the future economic relationship. Sterling rallied as much as +1.26% at one stage to close in on $1.41, before settling down to close at $1.402 and the highest since mid-Feb. The stronger Pound did weigh on the FTSE 100 (-1.69%) however which all of a sudden is at the lowest since December 2016. The Euro was also kept busy yesterday by headlines suggesting that ECB policymakers have begun shifting the debate towards the steepness of the rate path with even the most dovish members accepting that QE should end this year. Specifically, it was a Reuters story which caused a few heads to turn. The story also suggested that policy makers were comfortable with market pricing, including for a rate hike by mid-2019, but that no big decision was likely to be made at the April meeting and instead only small changes to the statement is expected for now. Confirmation of the market pricing isn’t a huge surprise but – if the story has some legs to it – the prospect of ECB officials already moving to debate around rate hikes is fairly significant. The story helped 10y Bund yields actually rise nearly 4bps and back above 0.60% at one stage before the broad flight to safety across markets put the brakes on that move and saw Euro bond markets close more or less unchanged by the end of play. Staying with the ECB, one of the bank’s policy makers, Yves Mersch, noted yesterday that inflation has recently risen “more significantly than foreseen in October” and that “given the improving inflation outlook, we can gradually reduce our net purchases while maintaining a sufficiently loose monetary policy” He also added that “the trend in wages and underlying inflation seem to have turned a corner”. It’s worth noting that Mersch is considered one of the more hawkish ECB officials. Across the pond, it won’t come as a great surprise to hear that the White House wasn’t kept fully out of the headlines yesterday. Indeed, news that President Trump could be preparing to fire Special Counsel Robert Mueller quickly spread across the wires although a White House spokesman announced last night that the President is just “frustrated by the ongoing investigation”, rather than preparing to dismiss Mueller. Away from this there was an Axios story suggesting that Trump wasn’t done with just the aluminium and steel tariffs, and his administration was in fact tentatively planning to put tariffs on hundreds of Chinese products by the end of this month. In the late afternoon Canadian Prime Minister Justin Trudeau also told a conference that President Trump was “enthusiastic” about getting to a NAFTA deal, although the story was slightly light on specifics so the devil will really be in the details. Over at the G20 meetings, most global finance chiefs warned against protectionism with BOJ Governor Kuroda noting “the G20 will continue to emphasize the importance of free trade” while France’s Finance Minister Le Maire reiterated that there will only be losers in a trade war and that EU members want a full exemption from US steel and aluminium tariffs. On the other side, a senior unnamed US Treasury official told Reuters that the President strongly believes in free trade, but “where the expectation is America totally subordinates its national interest for free trade, is just one we don’t accept” and that instead “we believe in free trade with reciprocal terms that leads to more balance trade relationships”. Earlier on, senior EU officials told Bloomberg that the US will grant waivers to tariffs provided the EU meet five conditions, including limiting exports of the two materials to the US and actively addressing China’s various trade distorting practices. Finally, it was mostly second tier economic data releases yesterday but for completeness, the Euro area’s January trade surplus was below market at €19.9bn (vs. €22.5bn expected), while Italy’s January IP fell more than expected at -1.9% mom (vs. -0.6% expected). Looking at the day ahead, the main focus will likely be the UK’s February CPI, RPI and PPI data. German PPI for February will also be released, while the March ZEW survey should also be closely watched. In the afternoon the Euro area consumer confidence reading for March is due out. Away from this President Trump is scheduled to meet with Saudi Crown Prince Mohammed bin Salman. Illinois will also hold a primary election for governor and congressional seats ahead of the midterms later in the year.
Crude oil prices climbed by more than $1/bbl on the New York and London markets Mar. 16, but US light, sweet prices then dropped in early Mar. 19 trading on economic concerns, including suggestions of a trade war by some nations aimed at US steel and aluminum tariffs.
Steel levy row ‘bad’ for efforts on landmark North Korea deal
US steel and aluminium tariffs due to come into effect
Could Dennis Gartman be right? For the third day in a row, stocks have burst higher out of the gate, only to be met with a wave of selling which has promptly pushed the S&P to session lows. While there has been no specific news catalyzing the move, traders are attributing the move to a sudden drop in 10Y breakevens - with 10Y real rates unchanged - as long-term inflation pressures are suddenly looking far less pressing... ... which in turn has pushed Breakevens back levels not seen in one month as real 10Y yields remain rangebound. One potential factor spooking risk may be a Reuters headline, which confirms that the White House is seeking a $100 billion reduction in the trade deficit with China: DJ WHITE HOUSE CONFIRMS IT IS SEEKING $100 BILLION REDUCTION IN U.S. TRADE DEFICIT WITH CHINA This confirms reports from last week that the Trump administration is planning to cut the annual US trade deficit with China by USD100bn. For context, the US-China trade deficit reached a record USD375bn last year, which means the White House is targeting roughly 26.7% of trade. Meanwhile, after the tariffs on US steel and aluminium imports as per Section 232, the technology sector is considered the next target as the US wants to tackle China's use of intellectual property. Reports suggested such tariffs could come as early as this week with sources noting that anywhere between $30bn and $60bn in tariffs may be targeted. It appears that after generally ignoring trade war news, markets are becoming incrasingly sensitive to any trade developments in the aftermath of Tillerson's departure.
After two consecutive days of failed S&P ignition attempts, in which US stocks opened sharply higher only to close near the lows, on Wednesday the algos will try for the third consecutive time to escape the recent late-day selloff funk. S&P futures are higher after declining on Tuesday following a fresh personnel shakeup in the Trump administration and renewed US trade war speculation with China dampened investor sentiment. European stocks rose modestly led by mining shares even as Asian shares fell despite stronger than expected Chinese economic data. Equity markets were attempting to recover after Tuesday’s hefty losses, encouraged by stronger than expected Chinese factory data, but struggled to overcome fears of a global trade war as well as the prospect of political uncertainty in the United States. “As long as the threat of protectionism and a trade war remains, markets will remain vigilant,” Rabobank analysts told clients according to Reuters. The latest set of tariffs, reportedly targeting Chinese tech, electronics and telecoms, were revealed by sources hours after Trump abruptly fired Secretary of State Rex Tillerson. Tillerson’s exit follows that of economic advisor Gary Cohn, a strong free trade proponent. Since Trump took office in 2017 as many as 35 senior officials from his administration have walked out, including Tillerson, according to Citi. “The market probably correctly viewed this move as weakening internal White House opposition to some of Trump’s less market-friendly policies, in particular the President’s trade policy,” Daiwa strategist Mantas Vanagas said, quoted by Reuters. The negative momentum faded somewhat in Europe, with a pan-European equity index up 0.24% after falling 1% on Tuesday. That left MSCI’s all-country equity index down 0.12% its second day in the red, although a rebound in the US will likely push it back in the green. European stocks rose modestly after opening in the red after Tuesday’s plunge as traders assess the implications of a shakeup in the Trump administration amid corporate updates from companies including Inditex SA and Prudential Plc. The Stoxx Europe 600 Index rises 0.3%, with all major sectors with the exception of utilities are trading higher in the Euro Stoxx, while much of the morning stock movers have been dictated by company earnings, with Adidas (+9%) shares sitting at the top of DAX. Elsewhere, the IBEX underperforms its counterparts as index heavyweight Inditex (-3%) slipped after highlighting concerns over FX headwinds. Zara owner Inditex drops after reporting a slowdown in sales and its weakest profitability in a decade, while U.K. insurer Prudential rises after saying it divested 12 billion pounds ($16.7 billion) of annuities from its U.K. portfolio and plans to spin off its M&G Prudential unit. Miners were the best-performing industry group after Goldman Sachs analysts said the sector is enjoying robust global demand and after China reported strong economic data overnight. There was no bounce earlier in Asia, where markets followed the negative US lead with the Nikkei (-0.9%), Kospi (-0.3%), Hang Seng (-0.5%) and Shanghai Comp (-0.6%) all down. The latest batch of mixed activity indicators were released in China early this morning. Industrial production in February rose unexpectedly to +7.2% ytd yoy (vs. +6.2% expected; +6.6% previously), as did fixed asset investment (+7.9% yoy vs. +7.0% expected; +7.2% previously) while retail sales were slightly below expectations at +9.7% yoy (vs. +9.8%) from +10.2% in the month prior. As shown in the chart below, Chinese macro data has been disappointing in recent months so the modest upside surprise in factory orders was a welcome change. In global FX, the dollar pared an early decline as the euro felt some heat from another Draghi reference to the exchange rate, while the Yen rose following continued focus on the Moritomo scandal that has again rocked the Abe administration. A lackluster London session saw the pound shedding gains ahead of a May speech over the U.K.’s relationship with Russia. Bloomberg breaks down the latest overnight FX action: The euro set a day low of $1.2364 in early London trading after ECB President Draghi said in a speech that adjustments to monetary policy will remain predictable as policy makers look for further evidence that inflation dynamics are moving in the right direction He also said the central bank needs to monitor developments in the common currency closely as its appreciation since the beginning of the year cannot be explained solely by economic expansion AUD/USD saw leveraged demand on stronger-than- expected gains in China’s factory output and investment growth Kiwi shook off weaker-than-estimated 4Q current-account balance to climb on global fund demand to buy New Zealand’s bonds after Tuesday’s issuance Treasuries and euro-area bonds were little changed. German 10-year government bond yields approached one-month lows and currently stand 20 basis points below this year’s peak at 0.60 percent, following a soft 30Year debt auction. Economic data include retail sales and PPI. Williams-Sonoma and Signet Jewelers are among companies due to release results Market Snapshot S&P 500 futures up 0.3% to 2,776.00 STOXX Europe 600 up 0.3% to 376.55 MXAP down 0.5% to 178.18 MXAPJ down 0.4% to 587.85 Nikkei down 0.9% to 21,777.29 Topix down 0.5% to 1,743.21 Hang Seng Index down 0.5% to 31,435.01 Shanghai Composite down 0.6% to 3,291.38 Sensex down 0.4% to 33,720.90 Australia S&P/ASX 200 down 0.7% to 5,935.31 Kospi down 0.3% to 2,486.08 German 10Y yield fell 1.0 bps to 0.609% Euro down 0.2% to $1.2370 Brent Futures down 0.2% to $64.51/bbl Italian 10Y yield fell 0.9 bps to 1.737% Spanish 10Y yield rose 0.8 bps to 1.405% Brent Futures down 0.2% to $64.51/bbl Gold spot down 0.2% to $1,324.41 U.S. Dollar Index up 0.2% to 89.83 Top Overnight News ECB’s Praet says the central bank’s forward guidance on the path of policy rates will have to be further specified and calibrated as appropriate for inflation to remain on the sustained adjustment path toward levels below, but close to, 2% over the medium term The special election in southwestern Pennsylvania remained too close to call with all precincts reporting results. House seat in Pennsylvania may be a bellwether for the fall elections that will decide control of Congress Theresa May will meet with her national security and intelligence chiefs Wednesday to assess whether Russia has given a credible answer to her charge that it was behind the poisoning of Sergei and Yulia Skripal in Salisbury. She will then update Parliament on her response. China’s factory output and investment growth unexpectedly accelerated in the first two months of the year amid robust global demand U.S. Trade Representative Robert Lighthizer presented President Donald Trump with package of tariffs targeting equivalent of $30b a year in Chinese imports, but Trump urged him to aim for higher number, Politico reports, citing three unidentified people familiar with discussions Japanese Prime Minister Shinzo Abe and his finance minister denied ordering officials to tamper with documents at the center of a scandal rocking his administration. German Chancellor Angela Merkel was formally elected to a fourth term in a parliamentary vote, extending her 12 years in office at the helm of Europe’s biggest economy Germany may be ready to sacrifice Jens Weidmann in the contest of becoming the next head of the ECB in a trade for more influence on French President Emmanuel Macron’s push to create closer ties among euro countries European equities are trading in the green this morning, subsequently pairing the initial losses that stemmed from Asian and US bourses, which saw risk-sentiment soured by reports of Secretary of State Tillerson being fired and increased caution over trade wars. All major sectors with the exception of utilities are trading higher in the Euro Stoxx, while much of the morning stock movers have been dictated by company earnings, with Adidas (+9%) shares sitting at the top of DAX. Elsewhere, the IBEX underperforms its counterparts as index heavyweight Inditex (-3%) slipped after highlighting concerns over FX headwinds. Top European News Germany Ready to Sacrifice Weidmann as a Pawn in EU Chess Match Draghi Says Policy Adjustments to Proceed at Measured Pace Corin’s Billionaire Owners Said to Mull Sale of Orthopedic Firm Volvo Venture Seeks Top Self-Driving Role Angling for More Deals May Plots to Punish Russia as Crisis Over Poisoned Spy Deepens In Asia, equity markets were negative across the board as the region tracked the losses on Wall St, where sentiment was dampened after another high-profile departure from the administration in which President Trump fired Secretary of State Rex Tillerson, while trade war concerns were also stoked by reports the US is looking to impose tariffs on Chinese goods. ASX 200 (-0.7%) and Nikkei 225 (-0.9%) were negative with financials pressured amid the ongoing royal commission hearings in which NAB employees were said to knowingly approved fake loans to reach targets, while Nikkei 225 was pressured by a firmer JPY and with some analysts also noting ‘Abexit’ worries in the wake of the land-sale/cronyism scandal. Shanghai Comp. (-0.4%) and Hang Seng (-1.4%) conformed to the weakness with tech and telecom names weighed as the US seeks to impose tariffs of USD 60bln on Chinese goods, which would target tech and telecom products as a punishment for intellectual property infringement. Although, losses in the mainland were somewhat stemmed by mixed data including higher than expected Industrial Production and Fixed Asset Investments. Finally, 10yr JGBs were flat despite the weakness in stocks, with an uneventful BoJ minutes release and unchanged BoJ Rinban operation amount for 1yr-10yr maturities also ensured quiet price action. BoJ Minutes from the January 22nd-23rd meeting stated it is appropriate to pursue powerful easing and that price momentum to reach target is maintained. Top Asian News China’s Factory Output, Investment Rise on Robust Global Demand China Imposes Record $870 Million Fine for Stock Manipulation Noble Group Seeks to Sweeten Disputed Debt Deal After Backlash Toyota Offers Bigger Raises as Japan Pushes for Inflation Not Even Trump Can Slow Vietnam’s Economy, Official Says In FX, USD weakness amidst ongoing global trade war and White House personnel concerns remains the principle theme, as the DXY continues to reject advances towards the 90.000 level and beyond, which in turn is shifting the technical outlook more bearish. However, EURUSD and single currency crosses have been knocked back to an extent by comments from ECB President Draghi and Chief Economist Praet, reiterating that inflation is still below target and therefore policy needs to stay ‘patient, persistent and prudent’. Key downside risks were highlighted – FX and the aforementioned potentially adverse trade developments due to US President Trump’s import tariff proposals. Eur/Usd is back below 1.2400, but holding above the 30 DMA at 1.2345, and also eyeing decent expiry interest from 1.2390-1.2405 (around 1 bn). Conversely, Aud/Usd is testing resistance either side of the 0.7900 handle again and recent peaks just below the big figure, aided by some Chinese data beats overnight and more balanced rather than dovish/cautious RBA rhetoric via Assistant Governor Kent. Chart-wise, yesterday’s 0.7898 high forms the first/nearest bullish target and offers are touted around 0.7925, if 0.7900 is breached. Cable looks capped by the 1.4000 level, and Usd/Cad by 1.3000, while Usd/Jpy is back in the 106.50 area after a further retreat from 107.00+ peaks late last week and earlier this week with the 10 DMA at 106.31 holding in for now. Elsewhere, Eur/Sek just a fraction softer after broadly as forecast Swedish CPI data that will underscore growing calls for the Riksbank to refrain from tightening for longer. In commodities, oil prices are trading slightly higher with prices finding some slight reprieve from yesterday’s smaller than expected build in the latest API report, alongside the improvement in risk sentiment, which has seen WTI retest USD 61/bbl Looking at the day ahead, it looks set to be another important day of data with February retail sales and PPI, followed by January business inventories. It's worth also highlighting that the European Commission is expected to make comments on US steel and aluminium tariffs to the European Parliament. US Event Calendar 7am: MBA Mortgage Applications, prior 0.3% 8:30am: Retail Sales Advance MoM, est. 0.3%, prior -0.3% Retail Sales Ex Auto MoM, est. 0.4%, prior 0.0% Retail Sales Ex Auto and Gas, est. 0.32%, prior -0.2% Retail Sales Control Group, est. 0.4%, prior 0.0% 8:30am: PPI Final Demand MoM, est. 0.1%, prior 0.4% PPI Ex Food and Energy MoM, est. 0.2%, prior 0.4% PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.4% 8:30am: PPI Final Demand YoY, est. 2.8%, prior 2.7% 8:30am: PPI Ex Food and Energy YoY, est. 2.6%, prior 2.2% 8:30am: PPI Ex Food, Energy, Trade YoY, prior 2.5% 10am: Business Inventories, est. 0.6%, prior 0.4% DB's Craig Nicol concludes the overnight wrap Picking the right moment to run out and grab lunch is something of a fine art working in markets. Indeed, anyone who was out for the 12 minutes between 12.30pm GMT and 12.42pm GMT yesterday probably felt like they’d been gone a lot longer when they returned to their screens. It takes something fairly significant to overshadow US inflation data at the moment however the shock news that President Trump had ousted now former US Secretary of State Rex Tillerson was certainly enough to do just that. The announcement came via a tweet from the President and it also included confirmation that CIA Director Mike Pompeo would take over the role. Trump confirmed with reporters that Tillerson “had a different mindset” relative to the President with the Iran nuclear deal named as an example. It was no secret that Tillerson’s tenure had been somewhat rocky however it’s fair to say that markets were still caught off guard, despite his clock probably ticking. Indeed Politico also reported that Tillerson had no plans to leave and was also unsure why he had been let go. There were suggestions that Tillerson’s vocal statements on Monday about condemning the Russian government about its alleged role in the Russian spy incident in the UK could have played a part however that remains to be seen. Various news outlets also confirmed that Trump wanted a new team in place ahead of talks with North Korea and also ongoing trade talks. It’s not the first time that Trump has moved quickly in his administration without warning, with Reince Priebus and James Comey two other such examples. In fact, the NY Times also reported that Trump’s personal assistant, John McEntee, was let go on Monday and escorted from the White House, while another headline from the Times suggested that there would be more staff shifts this week. The bottom line for us is that all these moves show that the President is certainly moving a lot closer to his anti-globalist policy agenda. On that point, the view on Pompeo is that he and Trump are a lot closer aligned and that Pompeo is more likely to have the President’s ear. On a related note, it also appears that Larry Kudlow is now the favourite to replace Gary Cohn based on comments from the President yesterday. That’s perhaps more interesting given that Kudlow and Trump have clashed in the past over tax reform and also the recent tariff announcements. Aside from the 12 minutes of a slightly more positive risk environment following the US CPI report (more on that below), the Tillerson news certainly more than played its part in equity markets dropping from early highs. The S&P 500 finished -0.64% last night after being up as much as +0.67% at one stage. A Reuters story suggesting that Trump was seeking for tariffs of up to $60bn a year on China imports seemed to just extend selling pressure into the evening. Meanwhile the previously untouchable Nasdaq (-1.02%) snapped its 7-day winning run while in Europe the big mover was the export-heavy DAX which tumbled to a -1.59% loss. Moves for bonds were actually a bit more contained. The high-to-low range on 10y Treasuries was 6bps and the yield did fall to the lowest in over a week (2.828%) at one point, however by the end of play they were just 2.6bps lower at 2.843%. The 30y auction was also relatively solid with the highest award to direct bidders since October 2015. In Europe bond markets were broadly 1-2bps lower while the Greenback was well offered with the Dollar index falling -0.26%. Gold (+0.26%) also seemed to benefit from a flight to quality bid. With regards to the CPI data, that in-line +0.2% mom core print meant that the annual rate also held at +1.8% yoy for the third consecutive month. The unrounded reading was +0.182%, so the overall feeling was that it largely mirrored the marginally softer earnings number on Friday. However, momentum is still favouring the hawks with the three-month annualized rate now up to +3.1% and the highest since 2007. The six-month annualized rate is also at a robust +2.5%. That should be comforting to a Fed which is targeting the gradual approach for now though. As a reminder that is the last CPI report that the Fed will see prior to the FOMC meeting next week however they will benefit from the release of the February PPI data today. Expectations for that is also for a +0.2% mom core reading while the headline is expected to show a +0.1% mom rise in producer prices. Here in the UK there were no huge surprises to come from Chancellor Hammond’s Spring Statement. As widely expected the borrowing numbers for the current fiscal year and also the next were revised down. This year was revised down from £50bn to £45bn while next year was revised down from £40bn to £37bn. Headroom relative to the 2% cyclically adjusted borrowing to GDP target by 2020-21 is more or less unchanged versus the November estimate at around £15bn, so not a huge amount more fiscal room. Finally GDP forecasts remain fairly lacklustre and included a cut to the 2021-22 forecast. The 2018 forecast was however revised up one-tenth to 1.5%. Sterling closed up +0.40% last night versus the USD but that appeared to be more USD weakness related to the Tillerson news than anything else. Indeed versus the Euro, Sterling was closer to unchanged. Gilt yields also finished more or less unchanged by the end of play. This morning in Asia, markets have largely followed the negative US lead with the Nikkei (-0.83%), Kospi (-0.51%), Hang Seng (-1.30%) and Shanghai Comp (-0.60%) all down as we type. The latest batch of activity indicators were released in China early this morning. Industrial production in February rose unexpectedly to +7.2% ytd yoy (vs. +6.2% expected; +6.6% previously), as did fixed asset investment (+7.9% yoy vs. +7.0% expected; +7.2% previously) while retail sales were slightly below expectations at +9.7% yoy (vs. +9.8%) from +10.2% in the month prior. The combined Jan and Feb data is meant to smooth out the effects of the Lunar New Year. Meanwhile, the Pennsylvania Congressional District special election in the US is appearing to head for a neck and neck finish. Bloomberg is reporting that Democrat Conor Lamb holds a tiny lead of 579 votes over Republican Rich Sacconne, out of about 227,000 votes cast. Finally in Japan, the BOJ minutes showed most board members believe the bank must “persistently” pursue powerful easing. Notably, during Q&A BOJ Governor Kuroda noted “by combining various tools, it’s possible to shrink the BOJ’s balance sheet at an appropriate pace while keeping markets stable”. Turning back to Europe, another Politico article yesterday suggested that the Bundesbank’s Weidmann is the favourite to replace Mario Draghi as ECB President from October 2019. However the story also suggested that his support was receiving pushback, in part given Weidmann’s vocal opposition to Draghi’s QE policy and his strict enforcement of the EU’s fiscal policies. Other potential German candidates touted include Klaus Regling (current head of the ESM) and Marcel Fratscher (Head of the research institute DIW Berlin). Notably, the swing factor for the candidacy likely depends on the relative support of French President Macron, who has been relatively quiet on this topic. In other news, the OECD has upgraded its forecasts on global economic growth by 0.2-0.3ppt to 3.9% for both 2018 and 2019, with “private investment and trade picking up on the back of strong business and household confidence”. Across countries, growth in the US has been lifted to 2.9% for 2018 (+0.4ppt) and 2.8% for 2019 (+0.7ppt) in part due to the tax cuts and new fiscal spending increases, while the UK’s growth was revised slightly higher to 1.3% in 2018 and 1.1% in 2019. Notably, the agency also warned on protectionism and noted that “an escalation of trade tensions would be damaging for growth and jobs” and that countries should “avoid escalation and rely on global solutions to solve steel excess capacity”. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the February NFIB small business optimism index was above market at 107.6 (vs. 107.1 expected) and marked a fresh high since 1983. The survey also showed that c.1/3 of owners reported raising compensation to retain or attract workers in the month, the largest share in 17 years. In Europe, Italy’s Q4 unemployment rate was in line at 11% and the final reading of Spain’s February CPI was confirmed at 1.2% yoy. Elsewhere, France’s Q4 total payrolls was up +0.3% qoq (vs. +0.2% expected). Looking at the day ahead, we'll get final revisions to February CPI in Germany along with January industrial production and Q4 employment data for the Euro area. ECB President Draghi is scheduled to speak in the morning (8am London time), as well as the ECB’s Coeure, Praet Constancio and then Bank of France’s Governor Villeroy. In the US, it looks set to be another important day of data with February retail sales and PPI, followed by January business inventories. It's worth also highlighting that the European Commission is expected to make comments on US steel and aluminium tariffs to the European Parliament.
President Trump’s import tariffs caused delight in the US steel heartlands and outrage abroad. This report looks at foreign reaction, weak demand at home and innovation in the industry. We meet workers and bosses in Youngstown, Ohio — ‘Steel City USA’ — and interview John Ferriola, CEO of Nucor
Protectionist move delights steelmakers but raises questions for other manufacturers and fears of trade war
"Bulls beware!" is the ominous big picture headline from Societe Generale's latest Equity Strategy report. Simply put, Roland Kaloyan explains that investors are facing "a tired bull market" We started our 2018 equity outlook by highlighting our concern about the volatility regime given the amount of short volatility positions in the market. Looking forward, a higher volatility regime and tighter central banks should prevent US and European equity markets from extending this nine-year-old bull market much further. Expect the US earnings momentum to fade soon now that the tax reform impact is almost fully taken into account by analysts (2018 EPS growth: +19%). Escalating protectionist measures are a growing tail risk for us. The US midterm election in November will probably be another source of stress for equity markets, potentially pushing the S&P 500 back down to its fair value at 2500. While many of the factors underlying stock valuations are broadly-known, SocGen notes that there are now two new elements to factor in... 1) Rediscovering what volatility means Back in November when we rolled out our 2018 equity outlook we raised clear concerns regarding the positioning of volatility, which we identified as one of the major risks for a short-term correction facing US equities. Indeed, short positioning on VIX was extreme into the current correction. Unwinding proved particularly painful last month, with VIX rising by up to 50% intraday, a level not seen since 2015, and then only briefly, and before that 2009. This marked a turning point in the equity volatility regime for SG Equity derivatives strategists . If the VIX is back between 15% and 20%, intraday volatility remains very high, highlighting a lot of nervousness in the market. Back to a higher volatility regime Will the credit market be next to fall? The VIX and the credit market (US High yield spread) have been strongly correlated in the past. Now volatility has spiked; is credit the next to fall? Not just yet, reply our credit strategists. Since the start of year, they have been expecting more challenging conditions to appear only in the second half of the year, with the end of the EU’s Corporate Sector Purchase Programme (CSPP) and rising government yields. And now we have to add the possibility of a trade war. After the volatility, are we likely to see some tension in the credit market? Probably not until in the second part of the year, say our credit strategists. VIX and US high yield credit spread: six and half a dozen 2) Protectionism: bad news now taken more seriously Until lately, it seemed like markets were only putting stock in positive announcements (tax cuts), while brushing off the bad ones (Korea, the wall). With protectionism, the mood is changing. Markets like to split President Trump’s economic programme into two parts. There is the programme that supports equities, and this includes tax reforms and deregulation. And there is the programme that seems to create stress in the financial markets, and this includes a more restrictive trade policy. Among the various trade measures that the US administration can apply, only some are dependent on presidential power. The newspapers have never talked so much about tariffs in the US as they have in the last 18 months. Trends in the news – the newspapers are talking more and more about tariffs in the US The example of US steel tariffs Article 232 is being used to raise tariffs on steel and aluminium by 25% and 10%, respectively, from all countries that are a concern for national security. We have, in coordination with SG analysts, drawn up a list of global stocks likely to benefit (SG Global Long Basket: seven names) or suffer (SG Global Short Basket: 13 names) from higher tariffs. US steel producers will naturally benefit from this measure, Asian steel companies as well as US steel consumers (like automakers and homebuilders) would be penalised. All of which add to the contrarian result that SocGen proclaims: "We are not buyer of US equities"... This bull market is driven by P/E expansion, unlike the last one Below we present a comparison between the current bull market and the previous one. Between 2004 and 2008, US earnings grew faster than sales (i.e. rising corporate margin) and equity prices (i.e. P/E contraction: from 23x to 17x). Since 2011, corporate margins have remained roughly stable, earnings have grown by ~50%, while the equity market has doubled. This bull market has been mainly driven by P/E expansion (trailing P/E up from 17x to 24x). What is driving the P/E ratio in a bull market? The first intuition is earnings growth outlook. Accelerating earnings growth would rationally deserve high multiples. However, the chart below shows that earnings growth has systematically disappointed the start-of-year expectations every year since 2012. A second driver of P/E could be risk-free rates. Indeed, an overly low risk-free rate (for example when the Fed fund rate is below the core inflation level) would push companies to make more buybacks and investors to take more risk. Between 2003 and 2008, the real Fed funds rate increased significantly, while since 2009 it has been negative. In our scenario three rate hikes this year, it would move back into positive territory and thus put pressure on US equity multiples. It will be difficult for US equities to absorb higher bond yields Our equity risk premium model compares the long-term expected return on equities (as measured by the internal rate of return of equities) relative to long-term bond yields. The US equity risk premium currently stands at 2.7% which is one standard deviation below the longterm average (3.9%). We have actually seen a lower equity risk premium in the past, but only during the dotcom bubble. Hence, it would be difficult for US equities to absorb a much higher US Treasury yield. This is confirmed by the recent market swings. In the table below, we provide a sensitivity analysis of the US equity market to the equity risk premium and long-term bond yield. A 3% rise in the US treasury yield would theoretically push the S&P500 up to 2500pt. US earnings momentum to run out of steam soon In a US economy growing at 3%, any historical regression shows that earnings tend to grow at ~10% per year. According to our calculations done at the index level, the US tax reform would boost 2018 earnings by a maximum of 10%. Taking into account further tailwinds (rising oil prices and weakening USD), US EPS should grow by around 20% this year. US 2018 earnings growth is now well above 2017 and 2019 earnings growth: this is atypical of a tax reform impact. According to IBES, consensus analysts have revised up their 2018 US earnings estimates for all sectors since the beginning of the year. US 2018 earnings growth is now expected at 19.3%, so the impact of the tax reform has been taken into account almost fully. Additional evidence that this is the consequence of US tax reforms is the differential between EPS adjustments and EBITDA adjustments: for each US sector, 2018 EPS has been revised higher than 2018 EBITDA. Meanwhile, for both 2019 and 2020, the consensus has S&P 500 earnings growth at 10%. US earnings growth should thus run out of steam soon. Midterm elections: another potential source of volatility On 6 November, midterm elections will take place in the US. Control of both chambers of Congress is up for grabs: the Senate might be a tough hurdle for the Democrats, but they have a chance of gaining control of the House. According to Gallup polling, since 1946, when presidents have an approval rating of above 50%, their party loses an average of 14 seats in the House midterm elections, compared with an average loss of 36 seats when they are below 50% (the Democrats need 24 new seats to take control of the House). President Trump’s approval rating is currently at 39%. If either house of Congress flips, the US would be likely to encounter more political gridlocks. The Republican legislative agenda would be under pressure if not dead and no one could then exclude further investigations into the Trump administration. This could be new source of volatility for US equities, with both valuations and expectations at decade highs. While US large caps would probably be protected by a weaker USD in such a scenario, the Russell 2000 (small & mid caps, more domestic, weaker balance sheet) would be more at risk. * * * So, apart from fading earnings momentum, higher volatility, midterm election uncertainty, credit risk anxiety, and rising rates... everything's Goldilocks for stocks, right?
After Gary Cohn demonstratively resigned from the Trump administration last week in advance of Donald Trump's announcement of tariffs of 25% on steel imports and 10% on aluminum, some analysts panicked that what was coming was nothing short of Smoot-Hawley 2.0. So far, it has turned out to be a tempest in Jamie Dimon's proverbial teapot, with Canada, Mexico and Australia already exempted, and most European allies working hard to obtain footnotes too. It is also worth noting that the announced tariffs cover only a very small share of US trade. The chart below from Goldman shows that the relevant steel and aluminum imports into the US constitute only 1.8% of total US goods imports and would raise the average US import tariff by 0.3%. The trading partners most affected are (potentially) Canada, Brazil, and South Africa; but even for Canada, the tariffs would only cover 2.9% of total goods exports. What is more notable, and explains the market's initial panicked reaction, is that the tariffs, coupled with wider talk of greater protection for industries, go against a broad historical trend towards more free trade. The average effective US tariff rate has declined from around 20% in the 1930s to only 1½% in recent times. It is the fact that Trump is going against this grain that has sparked global anger among trade partners, many of whom have vowed to retaliate to the US should they not be granted exemptions too. And while the threats have so far not been very specific, retaliation seems highly likely according to Goldman, which believes that tariffs on a number of US goods—including jeans, bourbon whiskey, and motorcycles—are likely. This is summarized in the Goldman table below, which lays out both who is most likely to retaliate and how severe the response is likely to be: It is what happens next that is most interesting. According to Goldman's Jan Hatzius, "the pure trade effects of the announced tariffs and the expected retaliation are likely to be very small. For example, using estimates from the literature we find that the announced tariffs will result in a 0.2% fall in US imports when Canada and Mexico are exempt, and 0.4% when they are included." But this, the Goldman economist notes, focuses narrowly on the trade effects and ignores the broader macro repercussions of protectionism. He adds that the macro costs would rise notably if the trade war escalates. A severe trade war—in which everyone imposes a tariff on everyone else—leads to higher world inflation, tighter monetary policy and slower growth. This drag is amplified if equity prices drop around the world: financial conditions provide an important channel for negative spillovers. Open economies with trade surpluses—such as the Euro area—are hit hardest in this scenario. Goldman envisions 4 scenarios of what could happen next, in terms of rising severity: US tariffs without retaliation. We round up the announced tariffs to 1% of total imports, partly because the Trump administration has already announced a few specific tariffs (e.g. on Canadian lumber) and partly because some further restrictions are likely even in a mild conflict scenario. We allow interest rate and the exchange rate to respond endogenously to the tariffs, but assume that equity prices remain unchanged. A US-focused trade war. We assume that the US tariffs lead to retaliation from trading partners and further US tariff increases. In this scenario we assume that tariffs on all trade to and from the US rise by 5pp. But we assume that trading partners do not put up tariffs between each other; for example, the EU and China both put up a tariff against US imports but do not erect trade barriers between each other. A global trade war. We assume that each country imposes a 5% tariff on everyone else. For example, the EU puts up a tariff against China in response to the US steel tariffs in an effort to prevent Chinese steel from flowing to Europe. A global trade war with a global equity sell-off. We assume that global equity markets drop by 10%, in addition to the global 5% tariff. Goldman's simulations of the impact of these 4 scenarios on the global economy are laid out below: Some further details on each scenario: First—so long as its trading partners do not retaliate—US import tariffs have small positive effects on US real GDP (scenario 1). The increase in import prices reduces imports, which boosts domestic production and hence GDP. The growth lift is enough to outweigh the negative effects from higher inflation, which leads to higher interest rates and a stronger dollar. If no retaliation is expected, the simulation highlights the US incentive for erecting tariffs. But it bears emphasizing that the effects are extremely small: US real GDP is around 0.01% stronger after one year and core inflation is 2bp higher. Second, everyone loses in a trade war (scenario 2). The effects are now negative for the US as the foreign tariffs slow US exports, inflation remains higher than in the no-tariff baseline, the Fed raises interest rates slightly more quickly in response and the dollar strengthens more. The retaliation of trading partners cushions the negative trade implications of the US tariffs, but growth is still lower due to higher interest rates. That said, the effects remain very small even for a 5% tariff on all trade from and to the US. The global cost of protectionism rises more notably if a severe trade war erupts, in which tariffs go up everywhere (scenario 3). Global inflation now rises somewhat more notably, which weighs on world consumer spending and forces central banks to raise interest rates. The dollar no longer appreciates in this scenario. Open economies and countries with trade surpluses are most adversely affected, especially Europe. This is consistent with our European team’s view that the Euro area has much to lose from a trade war. Third, the costs of a trade war rise further if risk asset markets fall (scenario 4). A drop in equity prices reinforces the negative effects of the trade war. As one would expect, the adverse market response has more severe consequences in countries with large equity markets, especially the US, and the dollar starts to weaken in this scenario. The chart below is a summary of the cascading effects of a global trade war. It decomposes the GDP effects in scenario 4 into the four transmission channels. Here's Goldman: We see that US tariffs (without retaliation) provide a small boost to the US, and are painful for Canada and Mexico given their large trade exposure to the US (dark blue bars). Retaliation hurts the US (making the net effect on output negative) but helps the trading partners, particularly Canada which has a trade deficit and large exposure to the US (light blue bars). An “all out” trade war (grey bars) is particularly painful for the surplus economies, including the Euro area, Japan and China. The 10% equity drop hurts everyone, but the DM economies more so than EM (green bars). Goldman concedes that for now its model of the world economy under trade war is "highly stylized", and as such it does not capture the microeconomic gains from free trade, including benefits for productive efficiency and productivity. Moreover, the estimated macro effects are subject to large uncertainties. On the one hand, our simulations might understate the true effects of a trade war because our model does not include adverse confidence, or financial stability effects. On the other hand, our model might overstate the effects of tariffs as we assume that the fiscal revenues from tariffs are not used to stimulate growth. Allowing governments to use the tariff revenues to expand government spending or cut taxes would cushion the tariff effects further. Nonetheless, Goldman can still conclude that the announced US tariffs and their expected retaliation "pose a modest risk to our optimistic outlook for the world economy. But the risk would rise sharply if a broad trade war erupted and financial conditions tightened in response." Incidentally, this is precisely what various Fed speakers said last week. Perversely, the adverse scenario may be precisely what Trump ordered: after all, with many forecasters predicting that Trump's fiscal stimulus will be the catalyst that sinks the market as it overheats the economy and forces the Fed to hike more than most expect, the one loophole would be a suddenly cautious Fed which decides that hiking rates is not so prudent if a major potential risk event is hiding just around the corner, keeping rates lower for longer and indefinitely delaying the worst-case scenario for markets. A risk event such as a global trade war.
The traditionally quiet post-payrolls weeks will see a lot of attention paid to Tuesday's CPI print for validation - or denial - of recent inflation trends; traders will also look at Wednesday's PPI and advanced retail sales numbers, and Friday's building permits, housing starts, and industrial production report for indications if the recent economic stability is turning. After Friday's goldilocks average hourly earnings report, consensus expects a core CPI print of 0.2% mom in February, slowing after January's impressive 0.3% increase, while headline CPI is also expected to rise 0.2% on Tuesday. The next day, core PPI is also projected to raise a trend-like 0.2% mom in February while core core (excluding trade services) PPI should also see a 0.2% gain; we also get the US advanced retail sales report that day. On Thursday, analysts are looking for initial claims to be 225k in the week ending March 10th, down modestly from the prior week's reading of 231k. Market consensus is 0.3% mom, previous release is -0.3% mom. In other data: In the Eurozone, industrial production, final print of CPI and ECB speakers in the schedule. In the UK, little of note. In Japan, we have PPI, core machine orders, industrial production, capacity utilization and BoJ meeting minutes. In Canada, we receive existing home sales and manufacturing sales. In China, we get retail sales, industrial production and fixed assets investment. In Australia, we have home loans, investment lending, business surveys and RBA speakers. In New Zealand, we have current account and GDP. In the Scandies, in Norway we have central bank rates meeting and trade balance, while for Sweden we get unemployment rate, CPI and inflation expectations. In Switzerland, we have SNB rates meeting and sight deposits. Elsewhere: the Catalan parliament meets to elect a president for the region (Mon). Chancellor Philip Hammond will deliver his Spring Statement to MPs. Focus will be on the impact of Britain's payments to Brussels post-Brexit on public finances (Tues). EU finance ministers attend Economic and Financial Affairs Council meeting on risk in the banking industry and tax-planning schemes (Tues). In New Zealand, we receive Q4 GDP on Wed. Growth appears to have strengthened in Q4, supported by household consumption and trade (Wed). We expect SNB to leaves rates unchanged (Thurs). Russian election with Vladimir Putin likely to win another term (Sun). A summary of key global events by day courtesy of Deutsche Bank: Monday: As is the norm post payrolls, it’s a quiet start to the week on Monday with the only data of note being the US monthly budget statement for February. Politics should remain at the forefront, however, with Germany's Chancellor Merkel expected to sign a coalition pact with the Social Democrats in Berlin and Italy's Democratic Party due to hold a leaders' meeting to replace Matteo Renzi. EU government officials will also kick off the four-day meeting to discuss the EU's Brexit position. Tuesday: The big highlight on Tuesday is the February CPI report in the US, due out shortly after lunchtime. Away from that, we'll also receive the February NFIB small business optimism reading. In Europe, the only data of note is wages data for France for Q4, while late in the evening in Japan the latest BoJ meeting minutes are due out. In the UK, Chancellor Hammond will deliver the Spring Statement at just after midday. Other potentially important events worth highlighting include European Council and European Commission statements on Brexit, and the Special Congressional election in Pennsylvania. Wednesday: The main focus overnight will be the latest economic activity indicators out of China for February including retail sales, industrial production and fixed asset investment. In Europe, we'll get final revisions to February CPI in Germany along with January industrial production and Q4 employment data for the Euro area. ECB President Draghi is also scheduled to speak in the morning, followed by the ECB's Peter Praet and then Vitor Constancio. In the US, it looks set to be another important day of data with February retail sales and PPI, followed by January business inventories. It's worth also highlighting that the European Commission is expected to make comments on US steel and aluminium tariffs to the European Parliament. Thursday: With little of note in Asia the early focus for markets will be final February CPI revisions in France. Across the pond in the US, we are due to receive March empire manufacturing, February import price index, the latest weekly initial jobless claims, March Philly Fed business outlook and March NAHB housing market index data. Brexit-related headlines will likely be a focus too on Monday with EU ambassadors wrapping up their four-day meeting, which is expected to conclude with an approval of text for the EU's future relationship with the UK. Friday: We end the week in Asia with January industrial production data in Japan. In Europe, the most notable release will be the final February CPI report for the Euro area while in the US, February housing starts and building permits. * * * Focusing on just the US, the key economic releases are CPI, retail sales, PPI, empire manufacturing, import & export price index, building permits, housing starts, industrial production and U. of Michigan sentiment. There are no scheduled speaking engagements from Fed officials this week. Here is Goldman's preview with full consensus expectations: Monday, March 12 There are no major economic data releases scheduled. Tuesday, March 13 08:30 AM CPI (mom), February (GS +0.16%, consensus +0.2%, last +0.5%); Core CPI (mom), February (GS +0.19%, consensus +0.2%, last +0.3%); CPI (yoy), February (GS +2.20%, consensus +2.2%, last +2.1%); Core CPI (yoy), February (GS +1.84%, consensus +1.8%, last +1.8%): We estimate a 0.19% increase in February core CPI (mom sa), which would leave the year-over-year rate unchanged at +1.8%. Our forecast reflects strength in shelter categories and lodging away from home but also sequential deceleration in used car prices and a pullback in the legal services subcomponent. We do not expect a reversal of January’s sharp increases in the apparel category, which we believe reflected normalization in prices following a highly promotional holiday season. Similarly, we expect medical care prices to rise further, albeit at a slower pace. We estimate a 0.16% increase in headline CPI, reflecting a decline in utility prices. Wednesday, March 14 08:30 AM Retail sales, February (GS +0.4%, consensus +0.3%, last -0.3%); Retail sales ex-auto, February (GS +0.4%, consensus +0.4%, last flat); Retail sales ex-auto & gas, February (GS +0.4%, consensus +0.3%, last -0.2%); Core retail sales, February (GS +0.3%, consensus +0.4%, last flat): We estimate core retail sales (ex-autos, gasoline, and building materials) rose at a 0.3% pace in February. While retail spending growth appears due for a pickup following the January pause, the boost from tax cuts in the month will be partially offset by another year of tax refund delays. Given a modest increase in gasoline prices and the possibility of building materials strength given favorable weather, we look for a firmer 0.4% rise in both the headline and ex-auto measures. 08:30 AM PPI final demand, February (GS +0.1%, consensus +0.1%, last +0.4%); PPI ex-food and energy, February (GS +0.1%, consensus +0.2%, last +0.4%); PPI ex-food, energy, and trade, February (GS +0.1%, consensus +0.2%, last +0.4%): We estimate a 0.1% increase in headline PPI in February, reflecting a slight uptick in gasoline prices. We also expect 0.1% increases in the core PPI and the PPI ex-food, energy, and trade services categories. In the January report, the producer price index was firmer than expected, reflecting strength in the core measure. Thursday, March 15 08:30 AM Philadelphia Fed manufacturing index, March (GS +21.0, consensus +23.0, last +25.8); We estimate the Philadelphia Fed manufacturing index moved down 4.8pt in March reflecting potential drag from the recent stock market decline and uncertainty regarding tariffs. Commentary from industrials remains encouraging, and we expect the index to remain at expansionary levels. 08:30 AM Empire manufacturing survey, March (consensus +15.5, last +13.1) 08:30 AM Initial jobless claims, week ended March 10 (GS 230k, consensus 228k, last 231k); Continuing jobless claims, week ended March 3 (last 1,870k): We estimate initial jobless claims ticked down to 230k in the week ended March 10. The trend in initial claims appears to be falling, and we look for another low reading. Continuing claims—the number of persons receiving benefits through standard programs—fell by 64k in the prior week. Friday, March 16 08:30 AM Housing starts, February (GS +0.5%, consensus, -2.7%, last +9.7%): We estimate housing starts slowed to a +0.5% rate in February after a 9.7% increase in January. We expect better weather and solid increase in construction jobs growth to lead to a further increase in housing starts. 09:15 AM Industrial production, February (GS +0.5%, consensus +0.3%, last -0.1%); Manufacturing production, February (GS +0.5%, consensus +0.4%, last flat); Capacity utilization, February (GS 77.8%, consensus 77.7%, last 77.5%): We estimate industrial production rose +0.5% in February, as the utilities category likely rose further and manufacturing production increased, reflecting strength in auto manufacturing. 10:00 AM University of Michigan consumer sentiment, March preliminary (GS 97.5, consensus 99.5, last 99.7): We estimate the University of Michigan consumer sentiment index edged down 2.2pt to 97.5 in the preliminary estimate for March. We note some downside risk to our forecast from the recent stock market decline. The report’s measure of 5- to 10-year inflation expectations remained at 2.5% in February, near the middle of its 12-month range. Source: BofA, DB, Goldman, ING
The "goldilocks" mood that was unleashed after Friday's jobs report (high growth, low inflation) has spread around the globe, sending Asian and European markets higher as trade-war concerns took a back seat to economic optimism. The dollar slipped and Treasuries held strady even as the US Treasury prepares to sell $145 billion in debt today (including both 3Y and 10Y Paper), while most commodities fell. “Friday’s U.S. employment data was about as perfect a set of figures as you can get from a policy maker’s point of view. The increase in jobs was nothing short of amazing,” said ACLS Global's Marshall Gittler. “In other words, it was a ‘Goldilocks’ report: not too hot, not too cold, just right.” "Our customers are still bullish,” Chris Brankin, chief executive officer at TD Ameritrade Singapore, told Bloomberg TV. "You saw the jobs report last Friday, which was a perfect scenario -- you had an uptick in wages, but not too much. Investors have taken that opportunity to buy the market dips and we look for the bull market to continue." European shares shot up across the board, following their Asian counterparts, while emerging market currencies strengthened as investors bought up so-called riskier assets and sold safe haven securities such as gold and government bonds. After the S&P surged 1.7% on Friday - its second best day of the year - S&P futures have continued to levitate overnight, and are back above 2,800 and fast approaching their late January all time highs of 2,883. The Stoxx Europe 600 Index rose for a sixth day, poised for the longest winning streak since October as utility companies set the pace following a bid by EON for RWE’s Innogy. Germany’s DAX led gains in Europe, rising 0.9% while MSCI’s world equity index hit a two-week high. Concerns over tariffs have been weighing on European stocks, with the main European stock index hitting a seven-month low at the start of the month. It has recovered somewhat from that trough to rise 0.3% on Monday. Earlier, the MSCI Asia-Pacific ex-Japan Index climbed 1.4 percent, poised for a third session of gains. South Korea rose 1%, while Australia’s main index added 0.7 percent, boosted by mining shares on news that Australia could be exempt from new U.S. trade tariffs on steel and aluminum imports. Hong Kong stocks climbed with other Asian markets after Friday’s U.S. jobs report showed an increase in hiring without rapid wage gains: the Hang Seng gained 1.9%, its third day of gains, and the highest since Feb. 5. The Hang Seng China Enterprises Index jumped 2.1%, also up for third session, while on the maindland, the Shanghai Composite added 0.6% and the ChiNext Index of smaller shares rose 1.4%. In global FX, investors shifted their focus to politics sending the Aussie higher after the country secured an exemption from U.S. tariffs on steel and aluminum and as politicians from a wide range of other countries joined the chorus to also be on the list of Trump tariff exemptions. Meanwhile, as noted last night, the yen jumped after Japan’s Finance Minister Taro Aso refused to step down despite news that his name and that of Prime Minister Shinzo Abe were removed from documents connected with a land-sale scandal, creating uncertainty around the future of Abenomics. The advance however was pared after Aso said he won’t resign. Commenting on the USDJPY, Masashi Murata, a currency strategist at Brown Brothers Harriman in Tokyo said that "The theme for 2018 is the risk of the dollar-yen breaking 100,” adding that the yen above that level “wouldn’t look excessive from the perspective of its fundamentals.” Separately, Goldman analysts said that the BOJ and the Japanese government have “very limited” policy options for reining in yen appreciation, and they are most likely to take a wait-and-see stance until the latest round of gains comes to an end. Investors had trimmed holdings of yen last week on news U.S. President Donald Trump was prepared to meet with North Korean leader Kim Jong Un, a potential breakthrough in nuclear tensions in the region. U.S. officials on Sunday defended Trump’s decision, saying the move was not just for show and not a gift to Pyongyang. “Now the U.S. is back to goldilocks at least for now, the tariffs are less severe, and Kim and Trump are to meet,” said Shane Oliver, Sydney-based chief economist at AMP. “We still expect more volatility this year as many of these issues have further go run, but the broad trend in shares likely remains up.” The dollar edged lower a second day as markets digested Friday’s jobs report, which kept stocks in Asia and Europe underpinned. In geopolitical news, North Korea reportedly wants a peace treaty and to build ties with US, while its leader Kim also wants a US embassy in Pyongyang. In Brexit news, UK and EU companies reportedly could face an additional GBP 58bln in annual costs in the event of a no-deal Brexit. Meanwhile, UK consumer spending suffered its weakest start to the year since 2012, according to data compiled by Visa. In rates, the yield on 10-year Treasuries climbed less than one basis point to 2.90%,the highest in more than two weeks. Germany’s 10-year yield dipped one basis point to 0.64%, while Britain’s 10-year Gilt rose less than one basis point to 1.493 percent. Today, US rates traders will have a very busy day with the US set to sell $145BN in sells 3- and 6-month bills, as well as a 3-year notes and 10-year notes reopening. Big concessions into the auctions are expected to help soak up the massive supply. As a reminder the last time that the market faced a 3y and 10y auction on the same day last year Treasuries sold off following weak demand in the latter auction. Oil prices pared back gains seen on Friday with WTI (-0.5%) and Brent (-0.6%) seen lower amid concerns of rising US output looming in the market despite a slowdown in rig drilling activity recorded at the back end of last week. In the metals complex, following the US steel and aluminium tariffs, Chinese iron ore future fell for a 3rd straight session hitting near four-month lows closing down 2.6%. The steelmaking raw materials are under pressure from softer demand and high product inventories held by trading companies. The WSJ reported that OPEC is reported to be divided regarding views on the right price of oil with Iran said to prefer USD 60/bbl, while Saudi Arabia would prefer prices to be at USD 70/bbl. There were also reports that Iran Oil Minister Zanganeh stated that OPEC could agree in June to begin relaxing oil output cuts for 2019. Bulletin Headline summary from RanSquawk DAX outperforms amid multi-billion revamp in German utility sector. USD-index hovers around 90, having trimmed earlier losses. Looking ahead, highlights include the Eurogroup meeting, 3- and 10-year note auctions from the US Market Snapshot S&P 500 futures up 0.3% to 2,798.25 STOXX Europe 600 up 0.3% to 379.19 MXAP up 1.6% to 178.46 MXAPJ up 1.4% to 588.82 Nikkei up 1.7% to 21,824.03 Topix up 1.5% to 1,741.30 Hang Seng Index up 1.9% to 31,594.33 Shanghai Composite up 0.6% to 3,326.70 Sensex up 1.2% to 33,713.20 Australia S&P/ASX 200 up 0.6% to 5,996.12 Kospi up 1% to 2,484.12 German 10Y yield unchanged at 0.649% Euro up 0.2% to $1.2328 Italian 10Y yield rose 2.5 bps to 1.753% Spanish 10Y yield unchanged at 1.436% Brent futures down 0.6% to $65.10/bbl Gold spot down 0.3% to $1,320.39 U.S. Dollar Index down 0.1% to 89.98 Top Overnight News North Korean leader Kim Jong Un wants to sign a peace treaty and establish diplomatic relations with the U.S., which includes having a U.S. embassy in Pyongyang, Dong-A Ilbo newspaper reports, citing an unidentified senior official at South Korean President Moon Jae-in’s office China’s trade minister Zhong Shan warned that a trade war with the U.S. would bring disaster to the global economy, but said his nation won’t start one and that talks with the Trump administration continue China, Canada and Hong Kong are among the economies most at risk of a banking crisis, according to early-warning indicators compiled by the Bank for International Settlements Add one more thing to the list of worries for the world’s most indebted nation: weakening demand at its bond auctions. While there’s no danger of the U.S. being unable to borrow as much as it needs, over the past two years, the drop-off has been unmistakable Britain may soon start to see the beginning of the end of austerity, as the Chancellor of the Exchequer prepares to announce the smallest deficit in a decade during his Spring Statement on Tuesday London house prices are falling at the fastest pace since the depths of the recession almost a decade ago, with the capital’s most expensive areas seeing the biggest declines, according to a report published by Acadata on Monday Asia stocks were higher across the board as the region took its first opportunity to react to Friday’s rally on Wall St and jobs data from US where NFP smashed expectations, but wage growth slowed which in turn provided a goldilocks backdrop for stocks. ASX 200 (+0.6%) was led by commodity names after crude rallied over 3% on Friday and PM Turnbull confirmed Australia is to be exempted from US tariffs. Nikkei 225 (+1.6%) outperformed but closed off its best levels as the cronyism scandal continued to haunt PM Abe after Japan’s Finance Ministry confirmed documents had been doctored in a land-sale to a school operator which allegedly used ties to PM Abe’s wife to get a cheap deal on state-owned land. Elsewhere, Hang Seng (+1.5%) and Shanghai Comp. (+0.7%) also gained although the mainland got off to a slow start as US-China trade war concerns somewhat lingered and as participants also mulled over Xi’s power consolidation after China’s legislature voted to formally scrap presidential term limits from its constitution. Finally, 10yr JGBs are flat with demand constrained amid the heightened appetite for risk, while the BoJ were also in the market but kept its Rinban amounts unchanged from the prior. The PBoC injected CNY 50bln via 7-day reverse repos and CNY 40bln via 28-day reverse repos; the PBoC also set CNY mid-point at 6.3333 (Prev. 6.3451). As reported last night, Japanese Finance Minister Aso is under pressure to resign over a report regarding alleged favours to a school with connections to the Japanese PM Abe. The prime minister told parliament in February last year that he’d resign if any link emerges between himself or his wife Akie and the land deal. Top Asian News China Banking Crisis Warning Signal Still Flashing, BIS Says JPMorgan Sees Busiest Mideast Year With IPOs, M&A Driving Deals Japan Finance Minister Under Fire as Abe School Scandal Deepens; Stock Investors Are Nonchalant for Now as Abe’s Scandal Deepens China’s Mystery Russia Oil Partner Seen Delaying $9 Billion Deal The European cash open mimicked the strong positive sentiment seen in Asia and in the US on Friday following US NFP data beating expectations but wage growth slowing down providing a goldilocks backdrop for stocks. Major bourses are in the green (Euro Stoxx 50 +0.45%) with the exception of the FTSE 100 underperforming weighed down by a strong sterling. DAX 30 is supported by the utilities sector outperforming following reports of RWE (+8.8%) agreeing to swap control of Innogy (+12.9%) for renewable assets with rival E.ON (+5.4%). E.ON has agreed to purchase Innogy from RWE as part of a deal valuing at EUR 20bln, marking one of the largest shake-ups of the European power supply market. This could however place doubt on the deal between Innogy’s Npower and UK listed SSE (-2.2%). Following months of attempted takeover, Melrose (-2.9%) has submitted their final offer to engineering group GKN (+0.8%) of GBP 8.1bln following their previous offer of GBP 7.4bln which GKN described as “fundamentally” undervaluing its business and the approach as “entirely opportunistic”. Top European News Elkem to Raise $670 Million in Biggest Norway IPO Since 2010 May Faces Calls to Retaliate Against Russia After Spy Attack Ruble Is Top Pick for $25 Billion Investor After Czech Bonanza In FX, it has been a quiet start to the week, but the Greenback is weaker vs all G10 counterparts bar the Loonie, as Usd/Cad hovers above 1.2800 after last Friday’s mixed US and Canadian jobs data (to recap, the former blew away forecasts at 300k+, but latter just missed and would have been negative without part-time workers). The Kiwi is outperforming amidst equity market gains and mostly risk-on trade as it regains 0.7300 status vs the Usd, but Usd/Jpy has pulled back from marginal 107.00+ highs post-NFP to around 106.50 on the land sale scandal involving PM Abe and Finance Minister Aso. Note also, tech resistance around the 21 DMA at 106.79 is capping the pair, but hefty option expiries at 107.00 run off this Thursday and could keep the headline afloat. Aud another relative gainer and firmer within a 0.7845-80 range as Australia negotiates a security deal with the US to avoid aluminium and steel tariffs. Usd/Chf is probing back below 0.9500, Eur/Usd is sitting in a tight band above 1.2300 and Cable is holding between 1.3850-80 ahead of Tuesday’s UK Budget. Back to option expiries, but for today there is 1 bn either side of 1.2300 in Eur/Usd at 1.2275 and 1.2330 and just over 300 mn in Nzd/Usd at 0.7300. In commodities, oil prices pared back gains seen on Friday with WTI (-0.5%) and Brent (-0.6%) seen lower amid concerns of rising US output looming in the market despite a slowdown in rig drilling activity recorded at the back end of last week. In the metals complex, following the US steel and aluminium tariffs, Chinese iron ore future fell for a 3rd straight session hitting near four-month lows closing down 2.6%. The steelmaking raw materials are under pressure from softer demand and high product inventories held by trading companies. The WSJ reported that OPEC is reported to be divided regarding views on the right price of oil with Iran said to prefer USD 60/bbl, while Saudi Arabia would prefer prices to be at USD 70/bbl. There were also reports that Iran Oil Minister Zanganeh stated that OPEC could agree in June to begin relaxing oil output cuts for 2019. Looking at the day ahead, as is the norm post payrolls, it’s a quiet start to the week on Monday with the only data of note being the US monthly budget statement for February. Politics should remain at the forefront, however, with Germany's Chancellor Merkel expected to sign a coalition pact with the Social Democrats in Berlin and Italy's Democratic Party due to hold a leaders' meeting to replace Matteo Renzi. EU government officials will also kick off the four-day meeting to discuss the EU's Brexit position. US Event Calendar 10:30am: U.S. to Sell USD45 Bln 6-Month Bills 10:30am: U.S. to Sell USD28 Bln 3-Year Notes 12pm: U.S. to Sell USD51 Bln 3-Month Bills 12pm: U.S. to Sell USD21 Bln 10-Year Notes Reopening 2pm: Monthly Budget Statement, est. $216.0b deficit, prior $192.0b deficit DB concludes the overnight wrap So, another week and another hotly anticipated US inflation print for markets to be wary of. In fact, it should be a fairly busy week ahead with plenty of US data despite it being a post payrolls week, bumper Treasury supply which should be a decent test for bond markets and of course unpredictable politics to keep everyone on their toes. Indeed, no doubt the uncertainty fuelled by steel and aluminium tariffs tit-for-tat could continue, while markets will also be waiting for potential further details about President Trump’s meeting with North Korea leader Kim Jong Un. One of the big question marks is where they’ll meet exactly and we can’t help but feel that we could see some sort of Olympics style pitch between nations to host this hotly anticipated event. On a more serious note the reaction to the proposed meeting has actually been fairly mixed. The optimistic view is that a summit between the US and North Korea could offer a genuine opportunity to reduce tensions on the Korean peninsula, particularly in light of the failures of past agreements. However there appears to be an equal amount of scepticism with some suggesting that it could be an opportunity for North Korea to secure sanctions relief and buy time on nuclear efforts. Only time will tell but it’s clearly a very significant moment for geopolitics globally. Over the weekend CIA Director Mike Pompeo confirmed that the US will be making no concessions to North Korea and that discussions, if they do indeed occur, “will play out over time”. Back to that big data release for this week, as of this morning the market consensus is for a +0.2% mom headline reading and +0.2% core reading for US CPI on Tuesday. Our US economists expect +0.1% mom and +0.2% mom respectively. The latter should hold at +1.8% yoy should we see that, and in fact our colleagues add that the annual growth rate of core CPI will mechanically rise by around 20bps in the March data release just from annualizing the -10% decline in wireless telephone services. Meanwhile, also due tomorrow is the Special Congressional election in Pennsylvania which shouldn’t be underestimated as it will likely be seen as a decent bellwether for the prospect of Republicans holding onto majorities in the House and Senate at the November midterms. So that should be interesting. On the same day we’ll have the UK Spring Statement although our rates team and economists aren’t expecting any big policy announcements. The market should instead be focused on the publication of the 2018-19 Gilt remit. You can see a preview of the Statement here. In terms of other snippets, Germany’s Merkel and the Social Democrats are expected to sign a coalition pact today, while Italy’s Democratic Party will also start the search for their new party leader. Brexit related newsflow should also continue with the European Council and European Commission expected to make a statement on Tuesday while the four-day EU ambassadors meeting kicks off today. All that to look forward to then. Over the weekend it’s actually been fairly quiet for newsflow with the most notable coming from China with the – as expected – announcement that the presidential term limit has been repealed, which in turn will allow President Xi Jingping to in theory hold onto power indefinitely. The other story worth noting is the latest BIS quarterly report which notes that China, Canada and Hong Kong are among those economies most at risk of a banking crisis, based on early warning indicators. The report also pointed towards the dangers of increased passive investing, particularly with regards to “encouraging aggregate leverage”. Elsewhere, on the big protectionist theme reverberating through markets at the moment, China’s trade minister Zhong noted “there are no winners in a trade war…China does not wish to fight a trade war, nor will China initiate one, but we…will resolutely defend the interests of our country”. In Germany, Economy Minister Zypries noted “Trump’s policies are putting the order of a free global economy at risk” and that Europe needs to avoid being divided by Trump’s offer to exempt some countries such as Canada, Mexico and Australia. So, with the likely highlight for markets this week being Tuesday’s CPI report, it of course follows the softer than expected average hourly earnings data from Friday’s employment report. In fairness, it only just missed consensus as the unrounded +0.1498% mom compared to expectations for +0.2% mom however downward revisions to prior months meant the annual rate dropped to +2.6% yoy from +2.8% and back to the lowest since November. On the other hand, the other big takeaway from the report was the bumper payrolls number. The 313k print not only smashed expectations for 205k but was also the highest since July 2016. The two prior months were also revised higher by a cumulative 54k. Away from those usual headline grabbers’ one interesting aspect of the report, and which typically flies more under the radar, that our US economists pointed out was the increase in prime-age participation. Fed Chair Powell previously noted in his testimony that still low prime-age labour force participation is one remaining potential source of labour market slack. However, it was noticeable to see this climb four-tenths last month and to the highest since mid-2010. The bottom line is that this could still lend argument to the fact there is still some slack left in the labour market. All-in-all a bit of a double-edged sword sort of report then. Markets certainly appreciated the goldilocks nature of it with the S&P 500 rallying to a +1.74% gain by the close of play – and touching the highest level since February 1st -and 10y Treasuries climbing to 2.895% (+3.7bps). Fed Funds contracts are now implying odds of just under 25% for 4 rate hikes this year. We’ll of course find out in 9 days time at the next FOMC meeting if the data is enough to support an increase in the median dot to 4. Speaking of bond markets, it’s worth noting that the Treasury market is likely to face a bit of a supply test today as we’ll get both a 3y and 10y auction. As a reminder the last time that the market faced a 3y and 10y auction on the same day last year Treasuries sold off following weak demand in the latter auction. This morning risk assets are broadly higher in Asia following the positive US lead, with the Nikkei (+1.49%), Kospi (+0.99%), Hang Seng (+1.48%), ASX 200 (+0.55%) and China’s CSI 300 (+0.49%) all up as we type. Markets in Japan have pared back gains slightly following news that Finance Minister Taro Aso is supposedly coming under pressure to quit according to Bloomberg due to his involvement in a scandal related to the sale of public land to a school. Moving on. In terms of other markets on Friday. The Nasdaq rose +1.79% and to a fresh record high. European equities were broadly higher with the Stoxx 600 up for the fifth straight day (+0.43%) while the DAX was the laggard (-0.07%). Government bonds were weaker with core 10y bond yields up 2-3bp (Bunds & Gilts +1.9bp) while peripherals slightly underperformed. In FX, the USD dollar index fell 0.10% while the Euro was marginally down and Sterling gained 0.28%. Finally, WTI oil was up for the first time in three days (+3.19% to $62.09/bbl) while precious metals gained slightly. Away from markets, three unnamed sources told Reuters that ECB staff put forward a scenario to policy makers at last week’s ECB meeting suggesting the bank will end QE this year after winding down for three months followed by a rate increase in the middle of next year. One source noted these are “assumptions…. (and they) don’t have policy relevance because they are not commitments”. Notably, sources noted the hypothesis was met favourably by policy makers from the Euro area’s richer Northern countries, but less so by the Southern neighbours. On Friday we also heard from a couple of Fed speakers post the employment report. The Fed’s Rosengren noted that “I expect that it will be appropriate to remove monetary policy accommodation at a regular but gradual pace – and perhaps a bit faster than the three (rate hikes) envisioned for this year”. He also added that as the labour market continues to tighten “….one would expect to see continued upward pressure on wages”. Elsewhere, the Fed’s Evans noted the payroll report was a “very strong number” and was “looking forward to strong wage growth”. On rates, he noted that he continues to be nervous about inflation running below the Fed’s 2% target and believes “…we have the ability to be cautious”. With regards to the other economic data on Friday. In the US, the unemployment rate was steady mom at its 17 year low and slightly higher than expected at 4.1% (vs. 4.0%). Elsewhere, the final reading for January wholesale inventories was revised up 0.1ppt to 0.8%. Factoring in the above, the Atlanta Fed’s estimate of Q1 GDP growth was revised down 0.3ppts to 2.5% saar. In Europe, the January IP was broadly lower than expectations. In Germany, it was -0.1% mom (vs. +0.6% expected) weighted down by lower activity in the construction sector. Notably, annual growth is still solid at +5.5% yoy. France and the UK’s IP were both lower than expected at +1.2% yoy (vs. +3.8% expected) and +1.6% yoy (vs. +1.9% expected) respectively. Elsewhere, Germany’s January trade surplus was less than expected at €17.4bln (vs. €18.1bln) as exports weakened in the month, while the UK’s January trade deficit was -£3.1bln (vs. - £3.4bln expected). As is the norm post payrolls, it’s a quiet start to the week on Monday with the only data of note being the US monthly budget statement for February. Politics should remain at the forefront, however, with Germany's Chancellor Merkel expected to sign a coalition pact with the Social Democrats in Berlin and Italy's Democratic Party due to hold a leaders' meeting to replace Matteo Renzi. EU government officials will also kick off the four-day meeting to discuss the EU's Brexit position.
Authored by Ryan McMaken via The Mises Institute, When politicians run out of good arguments, their last refuge is often the claim that what they want is "necessary for national defense." Given that there are no economic arguments in favor of tariffs, it makes sense that the administration has resorted to the political "national defense" argument instead. So, even if the Trump administration were forced to admit that, yes, tariffs are bad for the incomes and standards of living for most Americans, they could still argue that everyone must make sacrifices for the sake of national security. But do these arguments hold any water? In a Defense Department memo, in response to the President's tariff proposal, the Secretary of Defense states that the tariffs are not necessary: ... the US military requirements for steel and aluminum each only represent about three percent of US production. Therefore, DoD does not believe that the findings in the reports impact the ability of DoD programs to acquire the steel or aluminum necessary to meet national defense requirements "The reports" mentioned here are Commerce Department reports pushing for the tariffs. The Defense Department memo goes on to advocate for a far more limited tariff than what the Trump administration wants, stating "DoD continues to be concerned about the negative impact on our key allies regarding the recommended options within the reports ... targeted tariffs are more preferable than a global quota or global tariff." The memo then concludes by noting that if the administration must have steel tariffs, it should at least wait on imposing aluminum tariffs. Given that it is in the best interests of the Pentagon to overstate the security threats to the United States, the Department's opposition to the scope and severity of the administration's tariffs highlight just how truly unnecessary the tariffs are. The DoD worries, as it should, that tariffs harm the American relationship with allies, and thus harm American security efforts. Even worse, tariffs are harmful to domestic economic strength, which is the real source of both hard and soft American power internationally. Implementing policies that are likely to diminish American productivity and competitiveness ultimately poses a direct threat to long term security efforts. As political scientist John Mueller has compellingly argued, it has long been the potential military production of the US, and not the current military budget or the current manufacturing output that has made other regimes fearful of conflict with the US military. That potential power is measured in current economic power and productivity. How Much Steel Does the US Get From China? But even if the US needed to gear up and start churning out steel for equipment overnight, how much of that would really depend on domestic sources? Well, as the Pentagon itself notes, it only needs three percent of US production. Let's ignore that number, though, and just pretend that the DoD would need foreign steel for military purposes. How much of that would need to come from China? Well, as it now stands, according to the Commerce Department's own data, the US imports 2.2 percent of its steel from China. Now, the administration has attempted to gin up this number by claiming that the Chinese are engaged in shadow imports of steel through the process of "transshipment." This happens when the Chinese export to some other country, and then that country adds value to the steel and exports the new product to the US. The Trump Administration is implying this happens a lot, although they haven't managed to provide any actual supporting data. Researchers outside the administration, however, have estimated that if transshipment-sourced steel is included, then total Chinese steel imports amount to about four percent. Why is this important? Well, the whole national-defense argument behind the administration's claims is based on the idea that hostile foreign powers will cut off US access to steel. At the top of the list of these "hostile powers" of course, is China. The argument also relies on the idea that if certain hostile powers cut off access to steel, it would also be impossible to make up the difference in imports from allies. But, as we've seen, China is a very small source of steel for the US, and out of the ten top foreign sources for US steel, seven of them are longtime US allies, including Canada, Japan, Mexico, Brazil, and Germany. Canada, which has been at peace with the US for 200 years, is by far, the largest exporter of steel to the US, making up 16.5 percent of all imports into the US. EU countries, the UK, and Australia combined offer an additional 15 percent. And yet, the administration has seen fit to impose a massive tariff hike on all of these allies in addition to the hike imposed on China. Only China is being accused of "dumping" and other unfair practices, but it's a bevy of US military allies with whom trade will suffer even more given their more prominent role in trading steel with Americans. It's easy to see why the Department of Defense expressed caution toward the imposition of Trumps' global tariff scheme. Needlessly antagonizing allies hardly contributes to successful national defense. And finally, there's the fact that steel tariffs are likely to actually hurt the productivity of defense contractors (an manufacturers in general) in the US. Remy Nathan of the Aerospace Industries Association writes: This [aerospace] industry contributes to America’s economic and national security in part by leveraging access to a global supply chain to produce the best products at the best price for our customers in a highly competitive international market. We need global sources of aluminum and steel to remain competitive, and demand for these products is increasing. Quotas risk reducing our access to these basic materials. Tariffs do not address all the necessary market conditions, such as energy costs, for new U.S. aluminum production to remain viable. Before issuing tariffs or quotas on aluminum and steel, Trump should consider the impacts of increased costs, decreased supply and disruption to the supply chain on a successful industry that is a key contributor to the U.S. economy. Our country’s history of imposing tariffs on raw materials like steel is not a good one. A study funded by the Consuming Industries Trade Action Coalition Foundation in 2003 found that raised prices resulting from the most recent tariffs imposed on imported steel in 2002 cost more jobs in the broader economy than existed in the steel industry at the time. In other words, driving up the cost of steel and aluminum simply reduces the amounts of resources that are available in the US for military purposes. But this isn't likely to change the mind of anyone in the White House. Like so many politicians before him, Trump justifies his foreign policy by invoking the most hysterical sand unlikely scenarios imaginable — while pretending that there is no opportunity in planning for such scenarios. The current claim is that the US must be prepared for the possibility that all foreign trading partners will cut the US off from steel — something that has about a zero percent chance of happening. Besides, the administration obviously doesn't actually believe this is likely to happen since it has no problem with entering into enormous weapons export deals with foreign states. The Trump administration has been openly pushing for greater arms sales to foreign regimes, including the terrorist-supporting regime in Saudi Arabia. Other recipients of American military weaponry and aid include Turkey, India, Iraq, Egypt, and South Korea. The US even sends weapons to Vietnam. The US State Department also provides billions in financing to purchase weapons to Egypt, Jordan, Iraq, and Pakistan. So, we're supposed to function under the paranoid assumption that the whole world is likely to cut off the US from trade — while at the same time shipping weapons and aid to those same countries that we assume will conspire to crush American access to steel. Obviously, these claims aren't especially convincing once we consider the full context. But none of that really matters, since it's fairly clear that the real motivations behind the administration tariffs lie elsewhere . The national-defense argument is just part of a larger political strategy to throw every possible justification at the wall and see what sticks. One minute, the administration pushes tariffs because of "unfair trade." The next minutes, it's to "create jobs." The next minute, it's about national defense. The tariffs are designed to protect specific industries so the President can score political points with a populist constituency. It's always been clear that good economics never had anything to do with the the President's trade policies. But his unconvincing claims about military defense show that his other arguments aren't much better.
China’s steelmakers need to heed US tariffs that are likely to trigger trade frictions despite little damage being done in the short term, according to analysts.
Далио является одним из самых заметных инвесторов, активно комментирующих действия Трампа и их возможное влияние на рынки. На этот раз миллиардер раскритиковал президента за развязывание торговой войны с Китаем
Spot the odd one out: Dow +700pts, USD Index unchanged, 30Y Yield unchanged, Gold unchanged. Here's one way to look at this week... or another... - Brought about world peace - Saved the US steel and aluminium sector - 313k NFP ...not a bad week for The Donald pic.twitter.com/KiWJH37s5K — RANsquawk (@RANsquawk) March 9, 2018 No matter which you prefer, the stock market overwhelmingly endorsed a lack of wage growth, the start of a global trade war, and the exit of the last globalist from The White House... From last Friday's open, it's been one way... Who could have seen that coming? Fresh record highs for the Nasdaq. As Bloomberg points out though, don't be fooled by Saturday newspaper headlines which scream: "Booming Job Growth Sends Nasdaq to Record High." Back in the financial pages there will also be a story worrying about the narrowness of the rally. An equal-weighted version of the Nasdaq 100 is not making a record high today, which only widens the gap with the modified cap-weighted index since Donald Trump's election. Just five stocks account for half of the 7.4% rally from the February 8 low to today's all-time high in the Nasdaq 100. The five - in order of point contributions: Apple, Amazon, Microsoft, Alphabet and Intel. Another way to look at it, 25% of companies in the index fell since the trough. Investors rushed into safe-haven FANG Stocks (up 6.9% on the week)... This chart from BofAML might suggest why - 2018 has started with the fastest inflows into tech stocks since the crisis... It seems bank stocks don't care about rates not moving or about Gary Cohn leaving The White House!! The Dow closed at its Fib 61.8% retrace of the Feb-Flop... NOTE how The Dow is finding serious support/resistance at these key levels... Today did not appear to be a short-squeeze as "Most Shorted" stocks flatlined as indices ripped higher... VIX flash-crashed to a 13 handle intraday, perfectly tagging the 100DMA at 13.31, before bouncing back but still closing notably lower on the week... Bloomberg notes that it appears an options trader dubbed the "Elephant" is responsible for the flash-crash as he returned to close out a portion of a March three-way trade. About 121.6k March $25 calls were bought for 25 cents, potentially closing a portion of a trade from Feb. 2 when ~526k were sold for 62 cents. Separately, 60k May $60 calls appear to have been bought for 15 cents vs open interest of ~6.1k. Treasury yields ended marginally higher on the week with the long-end outperforming...very narrow range for the week. This is the 11th day in a row that the 10Y yield has closed with a 2.8x% handle. Despite all the exuberance in stocks this week, the dollar index ended unchanged... While the dollar was unchanged, cryptocurrencies collapsed on the week with Bitcoin down 20% - one of its worst weeks in years... Bitcoin ended back below $9k... but NOTE the heavy-volume dumps at the European close each of the last three days... Gold ended the week unchanged, crude was lagging into this morning but ripped higher to close green... NOTE - WTI's big moves were all around the 11ET time (EU close) Bonus Chart: No one should be surprised by today's disappointing-wage-growth-driven rally - it is the norm!! Bad news is good news again... oh and Goldilocks is alive again.
If balanced, both trading partners seek and find increased demand for their products because of expanded markets. There may be some short term reductions. but most consumers will ultimately see decreased supply and higher prices, even though demand has remained level or decreased on both sides, due to less surplus income on both sides. If trade is not balanced then only the consumers in the country of lower exports sees job and income loss. Investors, traders, administrators and politicians [in and out the revolving door between government and industry] suck up the increase in profits. Few others of us benefit. It might make sense to have no foreign trade and make America independent again. That would be great for most people. But most people will continue to suffer from elite parasitism, because tariffs won't make America independent or great. Tariffs will make the prices higher and there's no guarantee we'll reduce our dependence on foreign goods. Some US steel consumers, like the oil industry, say it will cost them jobs [because] the US producers can't supply their needs.(1)(2) So should short term gain rule or would it be better to experience some discomfort now to unravel some of our dependence on foreign powers, by developing our own resources. (1) “... The U.S. can expect to lose between one and 1.5 oil and gas jobs for every single steel or aluminum job saved by the tariffs ... Implementing tariffs on specialty steel and aluminum, which many U.S. steel-makers do not supply in the quantities and timelines needed for projects, could harm America’s energy renaissance and jobs ...” https://www.houstonchronicle.com/business/article/Trumps-tariffs-will-cost-Texas-oil-and-gas-jobs-12739624 (2) "... Most important is the bigger economy-wide picture: The Chamber of Commerce and other groups have calculated that the loss of jobs in steel- and aluminum-using industries will far outnumber the new hiring of steel and aluminum workers. ..." https://www.nakedcapitalism.com/2018/03/michael-hudson-trumps-travesty-protectionism.html
As we pointed out yesterday, according to Deutsche Bank's Jim Reed who was commenting on the results of last weekend's Italian election, "it's hard to get away from the fact that the overall result was another resounding vote for populism. Indeed over 50% of votes submitted was for a populist party, including of course the party with the largest percentage - the Five Star Movement - and a possible kingmaker in subsequent coalition talks - the Northern League." Furthermore, as Deutsche Bank's populism index showed, the percentage of votes for populist parties on a population weighted basis was now around 32% - a level its largely held since the Trump inspired surge in 2016. In fact, you had to go all the way back to the WWII period to find the last time that populism had such support. A focus just on Europe showed that the continent with the high double-digit youth unemployment has become a hotbed for anti-establishment sentiment, which has everything to do with the economy, and lack of opportunities, and nothing to do with Russian operatives, much to Samantha Power's chagrin. Reid's troubling conclusion is that "it's hard to get away from the fact that populism is currently going through an explosion in support at present." Reid also notes that while the above index excludes a vote for Jeremy Corbyn's Labour party but "one could certainly argue that some of his more radical views and policies are populist in nature." And if DB were to include Corbyn's support in the 2017 UK General Election "then our index edges above 35%, eclipsing the 1940s highs, and to the highest since the turn of the 20th century." What are the implications: As of now the rise in populism hasn't yet destabilised markets however we find it difficult to get away from the fact that uncertainty levels are bound to remain high while such power brokers remain in major elections. Indeed the unpredictability of Trump's policies is such an example, with the recent tariff threats which have subsequently escalated market concerns about a trade war being one. At a time when global central banks are moving towards an unprecedented era of tightening and dealing with years of massive asset purchases, risks from rising populist support has the ability to seriously disturb the prevailing equilibrium of the last few years and subsequently markets. While Reid notes that this is more of a slow burning issue over the next few years, he concedes that populism remains the biggest threat "to the post-1980 globalisation/liberalism world order." * * * One day later, it was Bank of America's turn to opine on the topic of growing populism, which as chief equity strategist Savita Subramanian writes in a piece titled "From Globalism to looming trade war" is "gaining momentum around the world, exacerbated by mass population displacements and surging income inequality." She writes that "concerns over immigration, autonomy and global competition have played a role in political campaigns across the globe." In this context, the Trump administration’s latest announcement to levy tariffs on steel and aluminum imports is consistent with anti-globalist shifts seen in this presidency. Since Trump's inauguration, BofA sumamrizes, the US has also: imposed travel restrictions, withdrawn from the Paris Agreement on climate change, backed out of Trans-Pacific Partnership discussions, threatened to exit the North America Free Trade Agreement (NAFTA), and imposed tariffs on Canadian paper, imported washing machines and solar panels. So how did the US go from the paragon of globalization to the instigator of a looming trade war, and what happens next? The following 12 charts from BofA provide some context. 1. Natural disasters, violence and conflicts have led to a record number of persons being displaced. This has put pressure on other countries to absorb more immigrants, adding to social tensions. 2. Income and wealth inequality continues to rise globally. 3. While President Trump announced temporary tariff exemptions for Canada and Mexico, the implication was that permanent exemptions would be contingent on a successful renegotiation of NAFTA, which just wrapped up its seventh round of negotiations with agreement on just six of the 30 chapters. 4. EU is the US’s single-biggest trading partner. EU officials have called out US steel, bourbon, motorcycles, jeans and various food/agricultural products as likely targets for retaliation. 5. Aside from metal producers, the industries most impacted by the steel and aluminum tariffs appear to be Electric Equipment, Machinery, Miscellaneous Manufacturing and Autos. 6. Since 1983, the S&P 500 has been down following the announcement of a trade action 35% of the time in the first seven days, but just 20% of the time in the first 30 days 7. Large caps tend to outperform small caps following the announcements, but small caps tend to outperform once the tariffs are enacted. And in general, stocks tend to do better than bonds and commodities. 8. Tech has among the highest outperformance rates in the 30 days following the announcement, the implementation and the ending of trade actions. Industrials, Telecom and Materials have the worst track record. 9. Growth-At-a-Reasonable-Price (GARP) and Quality tend to do better, while Value and Growth perform in-line. 10. The S&P 500 derives 30% of its revenues from outside the US vs. 21% for the Russell 2000 small cap index. This explains the recent outperformance of small caps and further supports our tactically bullish view on small caps over large caps. 11. Tech has the highest foreign sales exposure and a globally integrated supply chain, making a trade war a key risk for the sector, particularly if the next round of trade actions are aimed at China. 12. BEA data suggests that imports represent 6% of total operating costs for US private industries. Using that as a proxy, we estimate the impact of a trade war that resulted in a 2% drag on foreign sales growth and a 15% rise in import costs would result in a 6% drag on earnings. Source: DB, BofA
Крупнейшая американская сталелитейная корпорация U.S. Steel по итогам III квартала увеличила чистую прибыль в 2 раза в годовом значении. Спрос на трубы от нефтегазового сектора оказался выше, чем ожидалось.Чистая прибыль корпорации за июль-сентябрь выросла до $44 млн, или 28 центов на акцию. В III квартале 2011 г. прибыль составила $22 млн, или 15 центов на акцию.За исключением разовых факторов прибыль U.S. Steel составила 14 центов на акцию. Эксперты прогнозировали прибыль компании в размере 2 цента на акцию.Выручка U.S. Steel упала до $4,65 млрд с $5,1 млрд в III квартале прошлого года. Эксперты прогнозировали выручку в размере $4,64 млрд. По итогам III квартала компания поставила 5,3 млн тонн стали против 5,5 млн тонн годом ранее.