26 August 2019 Issue 823
Global Market Commentary
- United States: Sino-US trade war becomes tense again. China announced that it will impose tariffs on US$75 billion worth US imports. US President Trump counterattacked and raised 5% tariff on US$550 billion worth Chinese goods. For the entire week, the Dow fell by 0.99% to 25,628.90. The S&P 500 index fell by 1.44% to 2,847.11. The Nasdaq fell by 1.83% to 7,751.77 points.
- Europe: German Chancellor Angela Merkel said that it is possible to find a solution on the Irish border issue before the deadline for Brexit on October 31. The comments made the pound rise against the dollar. Over the week, the UK’s FTSE 100 index fell by 0.31%, the German DAX index rose by 0.42%, and the French CAC40 index rose by 0.49%. The STOXX 600 index rose by 0.47% for the week to 371.36 points.
- Asia: Trump said the US-Japan trade agreement is “a big deal.” Shinzo Abe also confirmed that the representatives of the two countries have successfully reached a consensus after “intensive” negotiations. Over the week, the Nikkei 225 index rose by 1.43% to 20,710.91 points. The MSCI Asia Pacific Index rose by 1.11% to 152.38 points.
- United States: Capital has flowed into the bond market as a result of the intensification of the Sino-US trade war. For the whole week, the yield on the US 10-year government bond fell by 2 basis points to 1.488%.
- Eurozone: German Chancellor Angela Merkel said that it is possible to find a solution on the Irish border issue before the deadline for Brexit on October 31. The comments made the market think that the risk of Hard Brexit was reduced. For the whole week, the German 10-year bond yield rose by 1 basis point to -0.677%.
- Oil Price: China announced tariffs on US goods, including crude oil levies, the market worried it may affect the demand for crude oil and the global economic prospects. Over the week, New York oil futures fell by 1.17% to close at $54.17 a barrel.
- United States: China announced that it will impose tariffs on US goods. In addition, Federal Reserve Chairman Powell expressed the possibility of interest rates cut at the Jackson Hole central bank meeting. The US dollar exchange rate fell sharply. For the entire week, the Dollar Index fell by 0.512% to 97.640.
- China: Sino-US trade war becomes tense again. China announced that it will impose tariffs on US$75 billion worth US imports. US President Trump counterattacked and raised 5% tariff on US$550 billion worth Chinese goods. The RMB fell. For the whole week, the yuan fell by 0.580% against the US dollar at 7.082.
- United States: The Sino-US trade war has deteriorated. China announced a counter-measure on Friday that would impose tariffs on US$75 billion worth US goods. Trump subsequently announced that the tariffs on the US$250 billion worth Chinese goods that have been in force will be raised from 25% to 30% from October 1.
- United States: Federal Reserve Chairman Powell claimed at the Jackson Hole Annual Meeting that the US economy is facing significant risks. His statement strengthened the market’s expectation of interest rate cut in September.
- United States: Trump said that the United States and Japan have reached a trade agreement in principle, and the agreement may be signed during the UN General Assembly.
- Eurozone: British officials denied that Prime Minister Johnson planned to hold a general election on October 17, and said that Johnson had no intention of suspending parliament to prevent it from blocking no-deal Brexit.
- Eurozone: The British Central Bureau of Investigation (CBI) announced that the UK’s CBI total industrial orders have stopped its fifth consecutive month decline in August, from negative 34 in July to negative 13 in August, far higher than market expectations of negative 25.
- Eurozone: The British government plans to have more promotions on Brexit issues in early September, with an aim to educate the British public for a no-deal Brexit.
- Japan: During a meeting with the South Korean foreign minister, the Japanese Foreign Minister said that the issue of South Korea’s World War II labor compensation was the biggest bilateral issue and strongly urged South Korea to change the current situation.
- Japan: Japan’s August Manufacturing Sentiment Judgment Index fell for the three consecutive months, from 3 in July to minus 4 in August, which was the first negative pessimism since April 2013.
- Singapore: According to data from the Singapore Bureau of Statistics, Singapore’s July Consumer Price Index (CPI) slowed further to 0.4% year-on-year, lower than the market expectations of 0.5%.
|China Market Commentary|
|• Sun Guofeng, director of the Monetary Policy Department of the People’s Bank of China, said that the reform and improvement of the LPR formation mechanism does not involve changes in market interest rates. The focus of the reform is the marketization of loan interest rates, so there is no direct impact on the RMB exchange rate.
• Huawei expects the US restrictions may cause an annual revenue reduction from consumer device business by $10 billion.
Trade War revive Belt and Road
After nearly a year of accusations, the “Belt and Road Initiative” recently come back headline of the market. Despite the concerns of developed countries that infrastructure will lead to debt traps, many countries have resumed cooperation with China.
According to statistics from the Ministry of Commerce of the People’s Republic of China, China signed a new order of 64 billion in the first half of the year, an increase of 33% over the same period in 2018. In 2018, after the presidential election, Malaysia overthrew the previously signed agreement because of the corruption scandal, which cast a shadow over the prospects of the “Belt and Road” projects in emerging markets.
However, many countries in emerging markets have returned to the negotiating table. In July, Malaysia restarted the 20 billion East Coast Railway project to change the previous suspension decision. In Indonesia, the controversial Jakarta-Bandung high-speed rail restarted two years after the suspension. At the same time, energy facilities and real estate projects have been approved.
Why is there a change?
First, the financial situation in emerging Asia has changed. Since the beginning of the year, the Bloomberg Asia (excluding Japan) financial condition index has rebounded to a one-year high. When the Fed began to restart the easing policy, Asian central banks also began to cut interest rates. Emerging market companies are welcome increase their debt level.
More importantly, when world trade growth fell to a 10-year low, infrastructure investment became the only way to revitalize emerging market economies. The question is where can I finance? There is no doubt that China is willing to become this role.
Opportunity for the “Belt and Road” project
Before the Financial Tsunami, China enjoyed the opportunity of rapid development of global trade and recorded a large amount of foreign exchange earnings. However, China also has a large amount of debt due to its large investment in infrastructure. After the Financial Tsunami, China’s domestic investment return in capital ratio is getting lower and lower. Since 2014, China has started investing more money overseas, including the “One Belt, One Road” initiative.
Other emerging market countries are less fortunate compared to China. As the trade war heats up, most economies, including Vietnam, are narrowing their current account surpluses. In the context of double deficits, large-scale financing has become more difficult. Chinese fundings bring new opportunities to the local market.
In fact, Chinese companies are more willing to invest in the US than in emerging markets. The data shows that in 2016, China’s purchase of US companies exceeded US$50 billion, and it is not uncommon for transactions to reach US$100 million per single agreement. However, since Trump took office as the US president, the United States adopted more stringent conditions to screen Sino-US acquisitions, and the Chinese acquisition activity suddenly stopped. The funds are re-focusing on emerging markets.
Geopolitical decision-making for the Belt and Road Initiative
The United States still has extensive influence along the Belt and Road in Southeast Asia. Most countries are reluctant to get close to one country and offend another. In the past, China’s influence in Southeast Asia still lags far behind the United States, and more and more people agree with China’s voice is strong than before in Southeast Asia.
In April, China held the Belt and Road Summit. At that time, China was not optimistic about the situation, but the situation began to change.