FIG Topics of Interest

 

04/06/18

“You have to go after the people who aren’t treating you right,” Trump said. “We’re going to have a fantastic relationship long term with China, but we have to get this straightened out. We have to have some balance.”
https://www.bloomberg.com/news/articles/2018-04-05/trump-orders-consideration-of-100-billion-in-new-china-tariffs
Trump ordered his administration to consider tariffs on an additional $100 billion in Chinese goods on Thursday, sending U.S. stock futures tumbling. The U.S. president cited “China’s unfair retaliation” in response to his list of proposed tariffs earlier this week covering $50 billion in Chinese products.
"The Chinese side will follow suit to the end and at any cost, and will firmly attack, using new comprehensive countermeasures, to firmly defend the interest of the nation and its people,” the Commerce Ministry said in a statement on its website on Friday. The ministry said it would hold a press briefing at 8:00 p.m. in Beijing Friday.
Were China to want to match Trump’s latest threat, it wouldn’t have enough American goods imports to target. It could take other measures like curbing package tours or student transfers to the U.S., or hamper American companies operating in China.
Trump said U.S. Trade Representative Robert Lighthizer would identify which new products may be subject to tariffs. He later stressed that any additional tariffs first would be subject to a 60-day public comment period.

“No tariffs will go into effect until the respective process is complete,” Lighthizer said in a statement. The administration hasn’t said when any of the proposed tariffs would go into force.

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04/05/18

So you can't buy a new machine gun but, you can buy a machine gun...
The National Firearms Act of 1934 slapped a $200 transfer tax on them, the equivalent of $3,773 in 2018 dollars. In addition to machine guns, the act regulated silencers and shotguns with barrels less than 18 inches long. Then came the Gun Control Act of 1968, which further expanded the definition of a machine gun.
In 1986, President Ronald Reagan signed an act effectively banning civilians from purchasing NEW machine guns. Suddenly, most of those already out there became a lot more valuable (Goepfert says there were 250,000 at the time). Today, the exact number left isn’t known, though one industry expert put it at 182,000.
https://www.bloomberg.com/news/features/2018-04-05/how-one-man-got-rich-buying-and-selling-machine-guns-in-america
Since then, machine guns that can be sold legally are referred to as transferrable, meaning they were previously registered with the National Firearm Registration and Transfer Record, according to the ATF. Machine guns that weren’t registered—but should have been—are illegal to possess.
Machine gun buyers have to go through a local, federally licensed dealer who must first take delivery, charging a fee of up to $200. Such dealers are required to fill out paperwork transferring the weapon to them and submit it to the ATF. “That paperwork is everything,” Joy Goepfert says. “That is the license for the gun. That gun really is not valuable without that paperwork.”
Barring any mistakes, that initial process can take as long as a month. Once complete, Frank Goepfert says, the buyer has to make an appointment with local law enforcement and fill out a fingerprint card for submission to the ATF. Additionally, the buyer needs to fill out a certificate of compliance. After that, a buyer has to show up again at the local gun dealer, fill out further paperwork, pay the $200 transfer tax, and ship the whole file to the ATF. Upon receipt, the agency will begin a background check and examine the paperwork. This process can take six months.

Click here to download a pdf of this article, missile.2.pdf
 
 

04/04/18

1. What is a trade war?
The dictionary says it’s “an economic conflict in which countries impose import restrictions on each other in order to harm each other’s trade.” Trump’s tariffs and the threatened retaliation from other countries meet this definition, but so do centuries of protectionist skirmishes by numerous countries in countless sectors. The recent escalation is stoking fears that Trump has set off a full-blown trade war by singling China out for retaliation for intellectual property theft. The quid-pro-quo actions by the U.S. and China over steel tariffs, Trump’s invocation of national security to justify some of his moves -- which could open a Pandora’s Box of similar claims by other nations -- and Trump’s threat to further punish the EU if it imposes counter-duties also add to the trade-war atmospherics.
2. What happened in previous trade wars?
One of the most notorious examples is the Smoot-Hawley Act passed by Congress in 1930 and often blamed for deepening the Great Depression. The law hiked U.S. tariffs by an average of 20 percent, initially to protect American farmers but then broadened as other industries lobbied for protections. As demand collapsed, countries scrambled to maintain their gold reserves by devaluing their currencies or imposing even more trade barriers. Global trade fell off a cliff.
3. Who wins in trade wars?
No one, if history is any guide. When President George W. Bush raised steel tariffs in 2002, U.S. gross domestic product declined by $30.4 million, according to the U.S. International Trade Commission. The U.S. lost about 200,000 jobs, about 13,000 of which were in raw steel-making, by one estimate. A report by the pro-free trade Peterson Institute for International Economics estimated that Bush’s tariffs cost about $400,000 for every steel-industry job saved. The World Trade Organization also ruled that the Bush tariffs were illegal. 
4. What has Trump done so far?
He’s imposing tariffs on $50 billion of products imported from China in retaliation for what he calls decades of intellectual property theft. He imposed tariffs of 25 percent and 10 percent, respectively, on steel and aluminum imports, which prompted China to say it could hit back with tariffs of its own. While he temporarily exempted allies, including the European Union, from the metals tariffs, he expects them to grant concessions to the U.S. to maintain the exemption.
5. Why did Trump invite this fight?
In a March 2 Twitter post, he declared trade wars “good, and easy to win.” His focus remains reducing the U.S. trade deficit, which shows the country imports hundreds of billions of dollars more than it exports. Stepping back from trade deals like the North American Free Trade Agreement and the Trans-Pacific Partnership also appeals to Trump’s base of voters in America’s Rust Belt. But talk of a trade war is alarming to many U.S. business leaders, who largely support existing trade deals, and the securities markets, which fear lower profits and slower economic growth if the U.S. turns protectionist and other countries retaliate.
6. Who has retaliated?
China hit $3 billion of U.S. wine, fruit, pork, steel pipe and other exports with tariffs on April 2. Many of the 128 products on the list originate from states that favored Trump in the 2016 presidential election. After the U.S. announced details of its tariffs on $50 billion of Chinese imports, China said it would retaliate against U.S. products “equivalent in scale and degree to the U.S. measures.” On April 4, it announced tariffs against U.S. soybeans, chemicals and aircraft. An even bigger worry for the U.S. is that China, the U.S.’s biggest creditor, will scale back purchases of Treasuries in retaliation. China’s ambassador to the U.S. doesn’t rule out the option. Other countries haven’t retaliated for the steel and aluminum tariffs, which took effect March 23, largely because Trump temporarily exempted many of them. Still, the EU is unhappy and warned it will respond with its own 25 percent tariffs on $3.5 billion of American goods. Like China, the EU says it will focus particularly on products from states that are part of Trump’s political base, including iconic U.S. brands of motorcycles, blue jeans and bourbon whiskey. In turn, Trump warned that he would impose a 25 percent penalty on European car imports if the EU carried out its threat.
7. When does the WTO get involved?
The U.S. took the first step on March 23, filing a "request for consultations" with China at the WTO on technology licensing. China also notified the WTO how it could respond to the steel tariffs with levies of its own, later adding later that it will challenge the legality of the broader tariffs, which it said were a “gross violation” and put the WTO in “unprecedented danger.” But retaliatory actions that unfold quickly can test the WTO’s somewhat ponderous deliberative process. The arbiter of international trade disputes was born in 1995 out of a set of agreements struck by countries trying to reduce trade barriers. If a government’s complaint about another nation’s trade barriers is seen as grounded, the WTO recommends acceptable retaliation. In the case of steel, Trump is invoking a seldom-used clause of a 1962 U.S. law that gives him the authority to curb imports if they undermine national security. Under WTO rules, countries can take trade actions to protect “essential security interests.” Other nations could challenge the validity of the U.S. use of that clause. They also could copy the U.S. move by citing national security to block imports themselves.
8. Could tariffs backfire on the U.S.?
Yes. Take steel tariffs. Many more people are employed in industries, such as auto manufacturing, that buy steel to make products, than in steel-making itself. Some consumers may also have to pay higher prices. Trade tensions could boost inflation more than desired by Federal Reserve policy makers, who might feel the need to raise rates more aggressively than planned. On the other hand, if the tariffs result in job losses and the economy slows, the Fed might want to ease the pace of rate hikes.
9. Are tariffs the only weapon in trade wars?
No, there are many others. Clamping down on Chinese investments in the U.S., which Trump is already doing, is one example. Talking down, or manipulating lower, one’s currency is another. Countries through the years have used other means to keep foreign goods out and protect homegrown companies, a practice known as mercantilism. Trump accuses China of using government subsidies to prop up its domestic industries. Some practices are overt, such as quotas, and others covert, such as unusual product specifications, lengthy inspections of goods at entry ports and intricate licensing requirements.
https://www.bloomberg.com/news/articles/2018-04-02/trump-wanted-a-trade-war-here-s-what-one-looks-like-quicktake

Click here to download a pdf of this article, Missile.pdf
 
 

04/03/18

“It’s pretty likely they’re going to have to go to the capital markets in the not-too-distant future,” said Bruce Clark, a credit analyst at Moody’s Investors Service. Tesla has $1.2 billion of debt maturing in the next 12 months and is expected to burn through $2 billion of cash this year. After repeatedly missing Model 3 production milestones, raising money could prove difficult, he said. “Their credibility has taken some hits.”
https://www.bloomberg.com/news/articles/2018-04-03/musk-needs-to-recharge-tesla-s-finances-to-make-the-model-3-go
Tesla is burning through more than $6,500 of cash every minute and would run out of funds before year-end without more financing, according to data compiled by Bloomberg. Musk has proven adept at raising money before, but it’s likely to be more expensive this time. The unsecured bonds Tesla sold just months ago are trading near record lows, and a similar sale is less likely because investors probably would demand a yield of at least 10 percent. That’s almost double the 5.3 percent Tesla had to offer last time.
Alternatives include debt that can be converted to stock.
“This is a company about growth, and growth needs financing,” said CreditSights analyst Hitin Anand, who estimates that Tesla will have to raise about $2 billion in the next six months, likely through a combination of equity and convertible debt. “You got lucky the first time around,” on the unsecured bond sale, Anand said. “If you test the market a second time and it fails, that loses confidence and hurts the equity even more.”

Click here to download a pdf of this article, Missile.pdf
 
 

04/02/18

The popularity of futures reflects an evolving market which is drawing in new participants many of whom prefer anonymous, open market trading venues like the CME Group’s (CME.O), which has a near-monopoly on rate futures. 
It also demonstrates the impact of regulations that have constrained risk taking by banks, harming liquidity in some bonds, and made trading over-the-counter derivatives more expensive. 
Volumes in futures have surged to $398 billion a day from $257 billion in 2010, while Treasury trading volumes have dwindled to $396 billion a day from $442 billion in the same timeframe. 
Volatility in Treasuries that sent benchmark 10-year yields to four-year highs last month has helped boost activity. 
“CME rates product usage has increased from greater participation of buy-side clients and continuation of deep and consistent liquidity, in an environment when rates volatility has started to increase from very low levels,” said Agha Mirza, CME’s global head of interest rate products in Chicago. 
Bank of America Merrill Lynch’ three-month MOVE index .MERMOVE3M, which gauges volatility in Treasuries, jumped to 67 in February, the highest in 10 months. 
New rules that require more capital to back over-the-counter derivatives are also being phased in, which is driving more investors to futures as an alternative. 
“Investors are comparing to futures and seeing where the futures alternative is cheaper,” said Kevin McPartland, head of research and market structure and technology at consultancy Greenwich Associates. 
Greenwich estimates that trading in rate futures can be as much as 70 percent cheaper than doing the equivalent trade with a centrally-cleared interest rate swap. A Greenwich survey of dealers and derivatives users found U.S. respondents expected to move 11 percent of swaps trading to futures, while European participants planned to move 17 percent. 
Futures benefit from leverage and from not being held on bank balance sheets. Rate futures are also attracting firms seeking opportunity in fixed income as alternatives to equity strategies. 
“As the principal trading world has moved away from equities trading due to a decrease in profit opportunities, fixed income has become a big growth area, particularly in futures markets for a host of reasons,” said McPartland. 
The number of firms with large open interest in interest rate futures at the CME rose to a record 2,086 in February, and is up from 1,649 a year earlier. Volumes in the CME’s interest rate futures edged over 100 percent that of Treasuries on March 7, based on a 52-week moving average. That is up from 94 percent a year ago and 58 percent in 2010. 
Rate futures account for 33 percent of the CME’s trading and clearing revenues, according to its most recent annual report. 
Moves to relax some regulations may reduce the relative advantages of futures, though they are not likely to reverse the trend.
The Federal Reserve is seen as close to easing some of the bank capital requirements. Market participants have blamed a rule known as the supplementary leverage ratio for reducing liquidity in non-benchmark Treasuries known as “off-the-runs.” 
“Some of the suggested changes on leverage would make trading-off-the-run Treasuries easier, which would reduce the relative attractiveness of futures,” said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets in New York. 
The International Swaps and Derivatives Association (ISDA), which represents the privately traded derivatives industry, has also said it may challenge the capital requirements for swaps because they are more onerous than for futures. 
“I think if you were able to get the charges down on swaps people would migrate to swaps because a lot of people prefer swaps to futures,” said Michael Schumacher, head of rate strategy at Wells Fargo in New York. 
To the CME, new regulations compliment capital advantages that already favored the futures contracts. 
“All of those became more amplified and one could argue that there has been greater usage of futures,” Mirza said.

Click here to download a pdf of this article, Missile.pdf
 
 

03/29/18

Futures trading giant CME Group has reached a deal to buy U.K.-based trading firm NEX Group for £3.9 million ($5.49 billion).
CME will acquire London-based NEX in a transaction valued at £10 ($14) per share, consisting of £5 in cash and 0.0444 CME Group shares, based on CME's closing share price of $158.84 on Wednesday, the companies said in statements Thursday.

https://www.cnbc.com/2018/03/29/cme-group-deal-to-buy-nex-for-5-point-5-billion.html
The transaction is expected to close in the second half of 2018, pending on the approval of regulators and NEX shareholders.
NEX is a provider of currency and fixed income platforms, and other over-the-counter (OTC) post-trade products and services.

Click here to download a pdf of this article, Missile.pdf
 
 

03/28/18

The United States and South Korea have reached agreement on a revised trade pact that includes a side deal aimed at deterring competitive currency devaluation by Seoul and provides relief from U.S. tariffs on steel, senior Trump administration officials said on Tuesday.
https://www.cnbc.com/2018/03/27/us-and-south-korea-to-revise-trade-pact-with-currency-side-deal.html

South Korea's steel exports to the U.S. will fall by about 30 percent, but the Asian country is still subject to a 10 percent aluminum tariff.

The officials told reporters that the deal includes provisions outlined by South Korean officials on Monday, including a 20-year extension of the 25 percent U.S. tariff on pickup trucks and a doubling of the Korean import cap on autos that meet U.S. specifications to 50,000 per manufacturer per year.

The agreement, cobbled together quickly with only a few rounds of negotiations under Trump's threat of withdrawal, will include a side-letter that requires South Korea to provide increased transparency of its foreign exchange interventions, with commitments to avoid won devaluations for competitive purposes.

Click here to download a pdf of this article, Missile.pdf
 
 

03/27/18

(Bloomberg) -- 
As the adoption of electric vehicles becomes faster and more widespread, the impact of EVs on oil demand is on the rise – contrary to what some observers say, there is a noticeable effect on gasoline and diesel demand, according to recent analysis from Bloomberg New Energy Finance.
Passenger EV sales exceeded 1 million for the first time in 2017 and are expected to increase above 1.5 million this year. Over half of all EVs are sold in China.
Annual EV sales
BNEF expects the global fleet of passenger EVs to displace 46,000 barrels per day of fuel in 2018, 84 percent of which will be gasoline. BNEF also forecasts fuel displaced by Chinese passenger EVs will exceed that of the U.S. in 2018 as battery electric vehicles in particular continue to be incentivized by local government.
It is possible to calculate the level of oil being displaced by each EV coming onto the road by assuming that every EV is purchased in place of a conventional vehicle. The analysis is underpinned by regional assumptions for the efficiency and utilization of passenger cars. Indeed, not all EVs are equal in terms of their impact on oil demand, as the efficiency of conventional cars and the annual mileage driven in each region differs substantially.
Fuel displacement by EVs
The U.S. recorded the highest level of fuel displaced by passenger EVs in 2017 on the back of the sale of 200,000 such vehicles. A greater number of EVs were sold in Europe, but fewer barrels of oil demand were displaced as Americans drive less efficient cars further on average compared with Europeans. Europe also has a high proportion of diesel cars compared with the U.S., and these tend to be more efficient than equivalent gasoline vehicles.
Most of the impact on fuel demand is being felt in China, underpinned by the rapid rollout of e-buses in Chinese cities. For every 1,000 e-buses on the road in the country, 500 barrels of diesel demand per day is unrealized. This compares with just over 16 barrels of oil equivalent per day for every 1,000 medium BEVs sold in China. Each e-bus on the road therefore displaces over thirty times more fuel than an average medium-sized BEV. Combined, passenger EVs and e-buses displaced over 180,000 barrels per day of fuel in 2017, equivalent to more than 1.5 percent of total Chinese oil demand.
Globally, in 2017 the cumulative displacement of gasoline and diesel by passenger EVs and e-buses exceeded 200,000 barrels per day for the first time. We expect this to increase to 280,000 barrels per day in 2018.

 

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03/26/18

Regulators around the globe began work on replacements for Libor, the London interbank offered rate, well before the U.K.’s Financial Conduct Authority set to put the beleaguered interest-rate benchmark out of its misery. In the U.S., enter the Secured Overnight Financing Rate, or SOFR, a new reference rate being introduced next week by the Federal Reserve Bank of New York in cooperation with the U.S. Treasury Department’s Office of Financial Research. The debut of SOFR is a critical step in a quest to wean more than $350 trillion of securities off Libor.
https://www.bloomberg.com/news/articles/2018-03-26/america-s-libor-replacement-is-ready-for-its-debut-quicktake 
1. Why the push to replace Libor? For decades, Libor provided a reliable way to determine the cost of everything from student loans and mortgages to complex derivatives. It’s derived from a daily survey of about 20 large banks that estimate how much it would cost to borrow from each other without putting up collateral. Because fewer banks make such unsecured loans, Libor was becoming more theoretical than real. That was vastly compounded by the discovery of rampant manipulation by U.S. and European lenders that were forced to pay billions of dollars to settle rigging and other charges. All this is why the FCA pledged to stop compelling firms to provide estimates by the end of 2021, and why regulators around the world are rushingto establish alternatives. 
2. How did the U.S. come up with SOFR? To develop and implement a replacement for the dollar-denominated version of Libor, the Federal Reserve in 2014 set up the Alternative Reference Rates Committee (ARRC), which brought together representatives from the private sector and regulators. By May 2016, the committee had narrowed the search to two options: the New York Fed’s overnight bank funding rate, and a rate based on repurchase agreements, which are transactions for overnight loans collateralized by Treasury securities. After a series of roundtables, and with feedback from advisory groups, the committee identified the latter -- SOFR -- as the best candidate. 
3. How does it differ from Libor?Where Libor relied on the expectations of bankers, SOFR is based on real transactions from a swath of firms including broker-dealers, money-market funds, asset managers, insurance companies and pension funds. It’s different from Libor as well in that it’s a secured rate, since the repo rates it’s derived from are collateralized, or backed by assets. It’s an overnight rate, based specifically on overnight loans; Libor, by contrast, covered loan maturities ranging from one day to one year. And the volume of trading underpinning SOFR is significantly larger: In 2017, it regularly exceeded $700 billion daily, versus an estimated $500 million for three-month dollar Libor, according to ARRC data. 
4. When will the change take place? The New York Fed will start publishing SOFR (as well as two other repo-based rates) on April 3, around 8 a.m. New York time. The rate will reflect transactions from the previous day. 
5. What comes next? The ARRC is instituting a six-step plan that includes the creation of various derivatives based on SOFR. Along those lines, CME Group Inc. plans to launch monthly and quarterly SOFR futures on May 7, pending regulatory review. Development of a derivatives market is critical, because without a deep and liquid one, regulators won’t be able to create longer-term SOFR-based reference rates, a key goal in expanding usage among market participants. 
6. Is the market ready to dump Libor for SOFR?So far there’s been a degree of complacency in reducing long-term exposures to Libor, according to NatWest strategist Blake Gwinn. ARRC has established working groups in order to get credit-based market participants to adopt fallback language in contracts for products such as loans and mortgages in the event Libor stops being reported. That’s a first step toward the eventual goal of getting firms to make SOFR their benchmark of choice.

 

Click here to download a pdf of this article, Missile.pdf
 
 

03/23/18

Congress approved the more than 2,200-page legislation swiftly with a midnight Friday government shutdown deadline looming. The plan was released only Wednesday night. The House approved the bill Thursday afternoon by a 256-167 vote with bipartisan backing.

The legislation would fund the government through the end of September. It would significantly boost military spending and increase funding for border security, infrastructure and efforts to fight the opioid epidemic, among other programs. It also includes measures meant to strengthen gun sale background checks and improve school safety.

Here are some of the bill's notable provisions:

  • It would boost Department of Defense funding by nearly $80 billion, the largest increase in 15 years, according to lawmakers. That includes a 2.4 percent pay increase for the military.
  • It would put $1.57 billion in new funding toward fencing along the border with Mexico and border security technology such as aircraft and sensors. Trump had sought billions more in funding for a physical barrier on the border after he promised to build a wall as a candidate.
  • The legislation would allocate billions in new funding toward opioid abuse treatment, prevention and research. Overall, it would put $4 billion toward those efforts.
  • The bill would put more than $10 billion more toward infrastructure projects to improve highways, airports, railroads and bridges. It will also put money toward high-speed broadband development. It would not directly fund a rail tunnel from New Jersey to New York that Trump opposed. But the project would be eligible for funding from programs that are getting a boost in the bill.
  • It would include a provision to strengthen the gun sale background check system, by pushing agencies to better follow existing procedures for the National Instant Criminal Background Check System. The so-called Fix NICS bill had bipartisan support.
  • The proposal would put more than $2 billion in new money toward mental health and school safety programs.
  • The legislation would adjust an issue from the GOP tax bill passed in December that helped agricultural cooperatives relative to corporate competitors. In return, Democrats secured an expansion of the low-income housing tax credit.

The bill would not include measures to shore up Affordable Care Act health insurance marketplaces, as some Republicans and Democrats hoped. It also would not pull funding for so-called sanctuary cities or Planned Parenthood, as some conservatives had hoped.

Click here to download a pdf of this article, Missile.pdf