FIG Topics of Interest



“President Trump deserves tremendous credit for the administration’s focus on eliminating the anti-US manufacturer subsidy China receives from the U.S. Postal Service,” Jay Timmons, the president of the National Association of Manufacturers, said in a statement. “This outdated arrangement contributes significantly to the flood of counterfeit goods and dangerous drugs that enter the country from China.”
President Donald Trump plans to withdraw the U.S. from a 192-nation treaty that gives Chinese companies discounted shipping rates for small packages sent to American consumers, another escalation of his economic confrontation of Beijing.
U.S. officials said the administration sought to revise the treaty in September and was rebuffed by other nations, prompting the decision to withdraw. The State Department will deliver a notice to the Universal Postal Union in Switzerland Wednesday, White House Press Secretary Sarah Huckabee Sanders said in a statement.
Under the union’s framework it takes a year for a country to withdraw, during which rates can be renegotiated. The officials, who briefed reporters on condition of anonymity, said postal rates wouldn’t change for at least six months, and that the U.S. would prefer to stay inside the union’s system.

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“These low-yield bonds pack a pretty big punch after hedging,” said Jim Caron, a fund manager at Morgan Stanley Investment Management, which oversees $474 billion. Caron is using the strategy to buy euro bonds and highlighted Spain, where he can get effective yields of nearly 5 percent on 10-year notes. “We do this across all of our portfolios. This is a lucrative quirk.”
But more than just being a savvy trade idea, it underscores how the longstanding and popular narrative of the U.S. as a go-to destination for yield-seeking bond investors is little more than an illusion.
While U.S. investors have few incentives to stay at home, the sky-high cost for foreigners to hedge the dollar means they have little cause to buy Treasuries. In some cases, their effective yields can fall below zero. Any letup in demand could drive up U.S. borrowing costs, at a time when the government can ill-afford to lose investors as it raises ever more debt to meet its widening budget deficits. (Of course, bond investors can always opt not to hedge, though making a bet on the direction of currencies entails an added risk.)
The trade works like this: A dollar-based investor buys euros, which currently sell for $1.1574, to invest in euro debt. To hedge against currency swings, she simultaneously enters into a forward contract to sell back the euros in three months at a fixed price, currently $1.1668 per euro. That transaction normally incurs a marginal cost. But now it produces a return of 0.81 percent, or nearly 3.3 percent annually -- the most since the euro’s inception in 1999.

(A similar pattern holds true for cross-currency basis swaps, a hedging strategy used predominantly by multinationals and central banks.)
Profits from hedging the euro have persisted for years, but they’ve gotten so large in recent months that more and more U.S. investors are taking advantage.

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“The potential amount of debt is an iceberg with titanic credit risks,” S&P credit analysts led by Gloria Lu wrote in a report Tuesday. Much of the build-up relates to local government financing vehicles, which don’t necessarily have the full financial backing of local governments themselves.

China’s local governments may have accumulated 40 trillion yuan ($5.8 trillion) of off-balance sheet debt, or even more, suggesting further defaults are in store, according to S&P Global Ratings.
With the national economy slowing, and a Beijing-set quota for issuance of local-government bonds not being enough to fund infrastructure projects to support regional growth, authorities across the country have resorted to LGFVs to raise financing, according to S&P. That’s left LGFVs “walking a tightrope” between deleveraging and transforming their businesses into more typical state-owned enterprises, the S&P analysts said.

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"If U.S. sanctions are imposed on Saudi Arabia, we will be facing an economic disaster that would rock the entire world," Aldakhil wroteon Sunday.

"It would lead to Saudi Arabia's failure to commit to producing 7.5 million barrels. If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure."
Oil prices could surge to all-time highs if the U.S. imposes economic sanctions against Saudi Arabia, according to an opinion piecewritten by the general manager of Saudi Arabia-based Al Arabiya television.

The warning from Al Arabiya's Turki Aldakhil comes amid heightened tensions between Saudi Arabia and the West, after journalist Jamal Khashoggi — a U.S. resident and prominent critic of Crown Prince Mohammed bin Salman — disappeared after entering the Saudi consulate in Istanbul on Oct. 2.


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“The big picture is the Chinese exports have so far held up well in the face of escalating trade tensions and cooling global growth, most likely thanks to the competitiveness boost provided by a weaker renminbi,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
“With global growth likely to cool further in the coming quarters and US tariffs set to become more punishing, the recent resilience of exports is unlikely to be sustained.”China’s vast export engine unexpectedly kicked into higher gear in September, producing a record trade surplus with the United States that could exacerbate the already-heated dispute between Beijing and Washington.
September exports rose 14.5 percent from a year earlier, the fastest pace since February, the customs data showed. That was well above August’s 9.8 percent and a Reuters poll forecast of 8.9 percent.
But the robust numbers reported on Friday by China’s customs agency - the last ones from China before U.S. congressional elections on Nov. 6 - could prompt a reaction from U.S. President Donald Trump.

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Janet Yellen recorded the warning a day before stepping down as Federal Reserve chair in February: Commercial real estate prices look strikingly high. Her successor, Jerome Powell, flagged it again a month later. Analysts at Goldman Sachs Group Inc. tried in May to put a number on it: Properties may be overvalued as much as 16 percent. Soon, Wells Fargo Chief Executive Officer Tim Sloan went on television, saying some deals looked “frothy” and that his bank was pulling back. In the past month, executives at regional lenders including U.S. Bancorp and KeyCorp have chimed in with similar concerns.
Yet, by some key metrics—most notably default rates—the market seems serene. So why all the handwringing?
Years of economic growth and easy financing have pushed prices for office towers, apartments and warehouses to record heights. Executives speaking out say they’re worried some buyers are betting too boldly that they can just keep raising rents.
Normally, banks would tap the brakes on lending, and the market would cool. But since the 2008 financial crisis—when banks became more disciplined—other lenders have muscled in and are keeping the financing flowing. They include debt funds with multibillion-dollar warchests that aren’t subject to the same level of oversight. Some are competing with aggressively low rates and terms. Now even some banks, under pressure to compete, have loosened standards in recent quarters, Fed surveys show.

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In recent public appearances, Powell has argued that the Fed can countenance a fall in joblessness to an almost 50-year low without triggering an inflationary surge in large part because Americans believe the central bank will keep prices under wraps. “The key is the anchored expectations,” he said last week.
The problem is that it’s not easy to divine what inflation beliefs are and how they might change. What’s more, there’s no measure of where companies -- arguably the most important players in setting prices -- expect the cost of living to go. That makes Powell’s focus on price expectations a potentially risky move as the Fed gradually raises interest rates.

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The Big Hack: The Software Side of China’s Supply Chain Attack

Even as Amazon, Apple, and U.S. officials were investigating malicious microchips embedded in Supermicro server motherboards, Supermicro was the target of at least two other possible forms of attack, people familiar with multiple corporate probes say.

The first of the other two prongs involved a Supermicro online portal that customers used to get critical software updates, and that was breached by China-based attackers in 2015. The problem, which was never made public, was identified after at least two Supermicro customers downloaded firmware—software installed in hardware components—meant to update their motherboards’ network cards, key components that control communications between servers running in a data center. The code had been altered, allowing the attackers to secretly take over a server’s communications, according to samples passed around at the time among a small group of Supermicro customers. One of these customers was Facebook Inc.
However, a person familiar with Apple’s investigation says that around the time the company discovered malicious chips, it also found a more serious problem with network cards on Supermicro motherboards. Some Supermicro servers had network cards that came with outdated firmware, so the machines that were delivered to customers contained a critical security vulnerability that had been fixed in newer versions. This was potentially a third avenue of attack. Security experts say attackers could take advantage of a known firmware vulnerability in the same way they would use a more traditional software exploit. Once inside a target network, hackers could seek out servers with the dated code and easily infect them.

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Automakers in the U.S. just had a bad month. Buckle up: It’s going to get worse.

Sales cratered in September. Toyota Motor Corp.’s dropped 10 percent, Honda Motor Co.’s were down 7 percent, Ford Motor Co. posted a decline of about 11 percent and Nissan Motor Co. saw deliveries fall 12 percent. A worsening U.S. auto market should be no surprise amid the shift in demand to SUVs from sedans and other models, as we explained last month. Retail and fleet sales both dropped.
The impact of tariffs and threat of further trade actions is beginning to show. As Ford’s CEO Jim Hackett said last week, the company could be looking at a $1 billion hit to its bottom line from metals tariffs. Rising input costs mean manufacturers will have no choice but to start pushing them through to consumers. Cars are already getting expensive in the U.S., as Tuesday’s results showed: Transaction prices rose an average of around 2 percent, or close to $700, across the board. Honda’s were up as much as 4.6 percent and Ford’s climbed about 3.2 percent.

When the auto industry is done fretting about the U.S. market, there will be the U.K.'s withdrawal from the European Union to contend with. Toyota warned this week that a hard Brexit would “disrupt” weekly revenue of $78 million at its British plant, which makes about 3,000 cars a week. Annualized, that's more than $4 billion a year at stake.

One strategy to brace for the tough new world has been the pivot to China, which we wrote about here. There’s still at least a semblance of sales growth in the world’s biggest car market, though it has slowed in the past couple of years. Toyota is going as far as transferring technology behind its Prius hybrid to Beijing – setting a scary precedent for what it might take to be successful there. Nissan has said it wants China to be its biggest market.

But here’s the thing: It may be too little, too late for the Japanese carmakers. They haven’t built a commanding market position in China and were left behind by the sales surge of 2016 and 2017. Trying to grab share when demand is showing cracks is unlikely to be a sustainable strategy. Data last month showed retail sales of locally made cars were down around 11 percent in August from a year earlier. SUV sales are dropping and talk of consumers retrenching is widespread.

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The U.S. and Canada reached a deal late Sunday to update the North American Free Trade Agreement, with each side bending on core issues.

The two countries will now join Mexico in updating the 1994 accord, which will be renamed the United States-Mexico-Canada Agreement. Here are highlights of what they agreed to:

1. Autos

Nafta talks were conducted under threat of a steep escalation of tension: imposition of U.S. auto tariffs. The deal struck Sunday offers a measure of protection for both Canada and Mexico, ensuring each country won’t be affected by any auto tariffs unless exports top 2.6 million units annually.

For each, that represents their current exports plus growth of at least 40 percent -- enough to mean that if the tariffs are leveled against the rest of the world, they likely wouldn’t hit Canada and Mexico for a couple of years. There’s no guarantee that the Trump administration will impose the tariffs at all, or keep them in place that long.

As expected, the deal calls for cars to have 75 percent of their content originate in the U.S. and Mexico, up from the current 62.5 percent, and for 40 percent of a car to come from workers whose pay averages more than $16 per hour. The rules are a central part of the U.S. strategy to rebalance manufacturing to benefit American workers.

2. Other Tariffs

The deal doesn’t resolve the dispute over U.S. tariffs on steel and aluminum imports from Canada and Mexico -- or the retaliatory tariffs that each country placed on them. But going forward, it did give a guarantee that no tariff applied under the same U.S. law could be imposed against Canada or Mexico for at least 60 days. During that period, “the United States and Canada shall seek to negotiate an appropriate outcome based on industry dynamics and historical trading patterns,” the countries agreed.

3. Dispute Panels

Nafta had three kinds of dispute settlement systems. The new deal will see two remain basically unchanged, but renamed, according to senior White House officials. State-to-state dispute settlement -- formerly in Chapter 20 -- is being kept. It has many critics, particularly in the labor community, because panels often get blocked and disputes linger for years.

The old Nafta’s so-called Chapter 19 dispute-settlement mechanism -- which hears bi-national anti-dumping and countervailing duties cases -- remains untouched in the new agreement, the officials said. Canada dug in to save those.

Investor-state dispute settlement, formerly in Chapter 11, will be phased out between the U.S. and Canada but remain in place for certain key sectors -- such as oil and gas, infrastructure and telecommunications -- between the U.S. and Mexico, according to the White House officials.

4. Dairy

As part of the deal, the U.S. is getting expanded access to Canada’s protected dairy market, long a thorn in the side of trade talks. Canada will eliminate its so-called Class 7 milk pricing system, a senior U.S. administration official told reporters. New measures will prevent Canada’s system from spilling outside its borders, while market access for the U.S. will exceed Canada’s concessions in Trans-Pacific Partnership talks, the U.S. official said. Canada gave up 3.3 percent of its market in those TPP talks, but the U.S. has since quit the deal.

5. No Sunset

The U.S. had demanded a sunset clause that would kill Nafta after five years unless the countries agreed to extend it. Few ideas upset the Canadians and Mexicans more than that. In the end, the countries agreed to a 16-year term for the deal, with a review to identify and fix problems and a chance of a deal extension after six years. U.S. Trade Representative Robert Lighthizer said in August that the review mechanism is designed to solve problems and prevent them from festering, rather than to terminate the deal.

6. Intellectual Property

The office of the U.S. Trade Representative boasted that the deal would provide “new protections for U.S. intellectual property,” which the U.S. had been seeking. Copyright will, for instance, extend 70 years after an author’s death.

7. Higher Thresholds

Both Canada and Mexico agreed to raise the thresholds at which they apply duties to cross-border purchase, another key U.S. demand. Mexico raised its so-called de minimis level to $100 from $50. Canada raised its to C$150 ($117) for duties, from C$20 earlier, and C$40 for sales taxes.To contact the reporters on this story:

Josh Wingrove in Ottawa at;

Jenny Leonard in Washington at;

Eric Martin in Mexico City at

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