FIG Topics of Interest



In Germany, the factory PMI came in at 44.5 in April, little changed from March and short of economists’ expectations. Demand was particularly weak in the key auto industry amid “some hesitancy among U.K.-based clients,” IHS Markit said. There was better news from the services index, which jumped to a seven-month high of 55.6, while employment in the sector rose.
Fresh signs of malaise contradict recent cautious optimism from ECB policy makers that the 19-nation economy will soon turn the corner. Governing Council member Ewald Nowotny said on Wednesday the economy should at least stabilize in the second half of the year.
Weakness remained visible in other parts of the global economy. Japan’s exports shrank for a fourth straight month in March and manufacturing there continued to decline this month. That may change if the reasons for optimism about the Chinese economy seen in some recent figures is borne out in the coming months.

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The draft includes subsidies for new-energy vehicles, smartphones and home appliances, said the people, who asked not to be named because they aren’t authorized to discuss the plan. The proposals are at a consultation stage with other government branches, and there is no guarantee that they’ll be approved, the people said. The National Development and Reform Commission, which is said to have drafted the plan, didn’t immediately respond to a fax seeking comment.

-An increase in the number of automobile licenses 

-A waiver on car-ownership quotas for families who don’t own vehicles

-Subsidies for people who exchange vehicles that are as many as 10 years old for electric, hybrid or fuel-cell vehicles

-No limits or traffic controls for new-energy vehicles

-Encouraging banks to increase auto loans in tier-3 cities or below

-Considering deducting auto purchases from personal income tax

-Subsidies of up to 13 percent for a home appliance purchase at a maximum of 800 yuan ($120) per purchase

-Exemption of value-added taxes for used-car transactions until the end of 2020


It’s notoriously difficult to own a car in major Chinese cities because of quotas put in place to tackle traffic congestion and air pollution. In Beijing, the annual new vehicle quota dropped to 100,000 in 2018, and each licensed gasoline-fueled car has to be idle one day a week. That’s prompted the government to provide incentives for motorists to drive new-energy vehicles -- including pure-battery electrics, plug-in hybrids and fuel-cell cars.

Existing ownership restrictions have hindered the growth of car sales, Cui Dongshu, secretary-general of the China Passenger Car Association, said in February. In Beijing and Shanghai, for example, drivers wanting a license plate for a gasoline-powered car must enter a years-long lottery or pay as much as 90,000 yuan.



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ECB policy makers aren’t opposed to President Mario Draghi’s move to examine the impact of the measure, but many don’t yet see merit in a switch to so-called tiering to exempt some bank excess reserves from the deposit rate, said the people. They didn’t want to be identified because such discussions are confidential.

Draghi didn’t consult the Governing Council before his remarks last month. While he didn’t mention tiering by name, the comments prompted speculation that the ECB could introduce versions of it which are already used in Japan, Switzerland and Denmark. When the ECB last cut its rate, in March 2016, it rejected such an approach as too complex.
Some governors have already publicly expressed personal skepticism about any softening of the negative-rate tool. Lithuania’s Vitas Vasiliauskas said in an interview that he isn’t keen on tiering, and Dutch central bank chief Klaas Knot said the policy has stimulated credit growth, and other considerations are “a little bit outside the realm of monetary objectives.”

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“This is an element of hidden leverage that is not appreciated,” says Jeffrey Snider, global head of research at Alhambra Investments. “We are eventually going to have a shock.”

While dovish comments by the Federal Reserve and other central banks have prompted investors to pile back into bonds, two troubling developments could make buyers uniquely vulnerable to deep and painful losses, they say. One is the sheer amount of ultra-low yielding debt, which means investors have almost no buffer in the event prices drop. That’s compounded by the worry liquidity will suddenly evaporate in a selloff and leave holders stuck with losses on positions they can’t get out of quickly.

Granted, nobody is predicting when things will turn ugly in the bond market, and history hasn’t been particularly kind to the doomsayers. Still, the risk is real, they say, and caution is more than justified. By one measure, the amount of investment-grade bonds has doubled to $52 trillion since the financial crisis. And yields have, on average, fallen to roughly 1.8 percent, less than half the level in 2007. If they were to rise by a mere half-percentage point, investors could be looking at almost $2 trillion in losses.

These worries aren’t new, of course, but they’ve attracted fresh attention as the amount of negative-yielding debt has climbed past $10 trillion. To some, it’s a sign investors have gotten a little too complacent and could easily get blindsided once growth and inflation start to pick up.

One way to assess just how much risk has been built into the bond market is by looking at something called duration. Simply put, it measures how much the price of a bond moves relative to a move in its yield.

Currently, the duration of $52 trillion of investment-grade bonds tracked by Bloomberg globally stands at about 7, close to a record high. (Bonds with low yields and long maturity dates tend to have the highest duration.) That means if yields rose a full-percentage point, the bonds would lose 7 percent of their market value. For a half-percentage point jump, that works out to 3.5 percent, or a $1.8 trillion loss.

“The debt load in the world is so high now that it can’t withstand any historically-normal size of interest rate increases anymore,” says Stephen Jen, chief executive officer of Eurizon SLJ Capital.

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This year is shaping up to offer another uncomfortable milestone: the moment Europe’s biggest economy is forced to come to terms with its shortcomings. Germany today feels like it’s living out the final days of an era; there’s an air of impending change for which no one seems prepared. The country remains wealthy and politically stable, but it’s hard to escape a sense that Germans are complacent about the threats to the foundations of their prosperity.
The twilight of Angela Merkel’s long chancellorship is at the center of this atmosphere. She’s led the country through global crises—the 2008 collapse, the Greek meltdown, the influx of refugees, and various threats to the euro. Merkel was the champion of austerity, and yet her stewardship of the German economic engine kept the continent stable. Her handpicked successor, Annegret Kramp-Karrenbauer, is a mostly unknown quantity. Her main achievement so far is fending off an anti-Merkel candidate to head the Christian Democratic Union party.

Beyond politics, there’s a technological revolution that will likely mean the end of the internal combustion engine. The German auto industry—from BMW to Mercedes and Porsche—directly employs 800,000 people and has an export value of more than €240 billion ($269 billion), according to the German Association of the Automotive Industry. Volkswagen AG remains the world’s biggest automaker by sales volume, its admissions of emissions cheating notwithstanding. But the country that developed the first modern car in 1886—a Benz, more than two decades before Henry Ford’s Model T—has been slow to shift to electric vehicles. That casts doubt on how much longer Germany can maintain its dominance of the global luxury-car market in the face of competition from China and elsewhere.

Then there’s the sclerotic banking sector. The Finance Ministry’s attempts to press once-mighty Deutsche Bank AG to merge with Commerzbank AG may save neither. Without a viable banking behemoth, where will German enterprise look for financing?

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Maybe the world economy isn't in such terrible shape after all. New projections from the International Monetary Fund, published Tuesday, show that expansion still has some legs. Growth will be a not-too-shabby 3.3 percent this year.
That's down from a previous forecast of 3.5 percent. So, yes, it's a cut. But not a dramatic one. These numbers are a way from one IMF definition of recession, 2.5 percent, and miles from the contraction recorded in 2009. Superlatives about the lowest growth since the Great Recession are misleading. 

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(Europe to China: Do as we say, not as we do).

The European Union and China managed to agree on a joint statement for Tuesday’s summit in Brussels, papering over divisions on trade in a bid to present a common front to U.S. President Donald Trump, EU officials said.

Diplomats reached an eleventh-hour accord on a draft communique after China made concessions on wording about industrial subsidies that removed a European veto threat, said one of the officials, who asked not to be identified by name. EU Council President Donald Tusk, European Commission President Jean-Claude Juncker and Chinese Premier Li Keqiang are due to attend the gathering in the Belgian capital.

While the EU pressed China to cut industrial subsidies and open more to foreign investment, Europe is resisting protectionism by Trump, wary of his trade war against Beijing. The EU is also keen for Chinese help in the fight against climate change after the U.S. withdrew from a landmark international accord to cut greenhouse-gas emissions.
The Trump administration on Monday threatened a sharp escalation in trans-Atlantic commercial tensions by proposing to impose tariffs on $11 billion of U.S. imports of goods from the EU in response to alleged European subsidies to plane maker Airbus SE, a rival of Boeing Co.

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With trucks getting stuck at the border, Mexican companies are being forced to pay more to bring in additional vehicles for loading shipments. While the U.S. has yet to see meaningful shortages in goods from Mexico, prices for at least one import -- avocados -- have soared amid worries over a border closure. Buyers of berries, limes and asparagus are making plans to limit potential fallout from such a shutdown.

“The delays have doubled, tripled, quadrupled -- it’s not an exact science,” said Jaime Castaneda, vice president for trade policy at the U.S. Dairy Export Council. Lane closures and weekend shutdowns are adding to delays, he said.
Despite Trump’s threats -- or because of them -- Mexico has been cooperating and “I don’t think we’re going to have an official shutdown,” Larry Kudlow, the top White House economic adviser, said Sunday on CBS’s “Face the Nation.”

Trump conceded Saturday in a tweet that traffic and commercial delays will result from “the large scale surge of illegal migrants trying to make their way into the United States.” He added that “until Mexico cleans up this ridiculous & massive migration, we will be focusing on Border Security, not Ports of Entry.”


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“Both sides do want an agreement, but they want to make sure it’s the right deal for their respective domestic audience,” said Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management in Hong Kong.

Drafts of an agreement to end a nearly year-long trade war would give Beijing until 2025 to meet commitments on commodity purchases and allow American companies to wholly own enterprises in the Asian nation, according to three people familiar with the talks.


The White House is particularly focused on Chinese purchases of American goods through the second quarter of 2020, to narrow the trade balance ahead of Trump’s re-election bid. For that reason, the U.S. is pushing for China to front-load a big chunk of the commodities purchases in the first two years the agreement is in place, people familiar with the situation said.

A U.S. decision to tentatively sell fighter jets to Taiwan may affect the outcome of this week’s talks as well as any Trump-Xi summit, one of the people said. Given the geopolitical sensitivities of such a sale, that issue would likely be raised only when the two leaders meet and is unlikely to be part of the trade negotiations led by Lighthizer.

The U.S. wants the right to take unilateral, “proportional” action against China if it fails to abide by the rules. A person familiar with the text said China so far agreed only to consider avoiding retaliation if the U.S. acted against Beijing but stopped short of a formal pledge to refrain from counter-punching.

One of the final issues is what will happen to the tariffs the two sides have imposed on about $360 billion of each other’s goods in the past nine months. Trump has suggested that at least some of the tariffs will stay in place, saying they are necessary “for a substantial period of time” to ensure Beijing keeps up its end of the bargain.

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“We’re coming to a big finish here,” Zach Pandl, Goldman’s co-head of global foreign exchange and emerging market strategy, said on Bloomberg Television after the U.K. Parliament again rejected all alternatives to Prime Minister Theresa May’s unloved deal to leave the European Union. “We do think we’re making progress despite these failed votes.”
Instead of a prolonged stalemate or a chaotic no-deal scenario, Pandl said a soft Brexit approach, which may include a permanent customs union packaged with a second referendum, could come within the next day or two.

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