FIG Topics of Interest



US Trade Representative Robert Lighthizer said on Wednesday that he was examining all available tools to raise U.S. tariffs on Chinese vehicles to the 40 percent duties that China is now charging on U.S.-produced vehicles.
Automotive duties on both sides have been increased by tit-for-tat tariffs. The United States imposed a 25 percent tariff on Chinese vehicles on top of the 2.5 percent it normally charges. China had lowered tariffs for all other countries to 15 percent, but imposed an additional 25 percent retaliatory tariff on U.S. vehicles.
"As the President has repeatedly noted, China's aggressive, State-directed industrial policies are causing severe harm to U.S. workers and manufacturers," Lighthizer said. "We are continuing to raise these issues with China. As of yet, China has not come to the table with proposals for meaningful reform."

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“Capex is the No. 1 story,” said David Woo, head of global rates and foreign exchange strategy at Bank of America Corp. “There are hundreds of data points coming out every month but that’s the one that I watch,” and bond traders should too.
The trade war and likely political gridlock after the midterm elections pose “the biggest uncertainty for capex and therefore U.S. rates and the U.S. dollar,” said Woo, who’s analyzed the economy and markets for almost a quarter century.
While few expect capex to collapse, there’s a growing debate over business investment, which encompasses spending on equipment, on structures such as factories and offices, and on intellectual property and software.
What Our Economists Say...

While recent data suggest that soft investment in the third quarter may carry over into this quarter or even the beginning of next year, the outlook for investment in 2019 is still positive. The supply-side impact from tax cuts has so far not materialized. But consumer demand is expected to remain above trend, and the economy continues to rub up against capacity constraints, signaling that business investment should gain steam next year.
-- Tim Mahedy, Yelena Shulyatyeva and Carl Riccadonna, Bloomberg Economics
“I don’t count business investment as down and out,” said Ellen Zentner, chief U.S. economist at Morgan Stanley. “But there are a lot of uncertainties about next year,” so the expansion “could slow more than anyone is expecting.”

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Ukraine’s parliament will vote on whether to impose martial law after Russia fired on its warships Sunday. Several sailors were wounded in the clash, which sparked the dramatic renewal of tensions between the ex-Soviet neighbors in the Kerch Strait, near Crimea, which President Vladimir Putin seized with his military four years ago.
President Petro Poroshenko has submitted his decree on martial law, which parliament is set to debate starting at 4 p.m. in Kiev. The text reveals that the measure would cover the whole country, not just regions in the immediate area of the long-standing conflict with Russian-backed fighters. It would begin Monday and remain until Jan. 25.
The decree also calls for a partial military mobilization, air defense of major government sites, industrial areas and troops, and heightened border security. One clause is marked secret and its details won’t be released to the public.
Russia was reacting to “an incursion into the territorial waters of the Russian Federation by foreign warships,” which refused to respond to requests from border guards, Kremlin spokesman Dmitry Peskov told reporters on a conference call. The Russian ships acted strictly in accordance with domestic law, he said.
Russia’s annexation of Crimea -- and the waters around the peninsula that include the Kerch Strait -- hasn’t been recognized on the international stage.

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The U.S. government is trying to persuade wireless and internet providers in allied countries to avoid telecommunications equipment from China's Huawei Technologies, the Wall Street Journal reported on Thursday.

U.S. officials have reached out to their government counterparts and telecom executives in friendly countries where Huawei equipment is already in wide use about what they see as cybersecurity risks, according to the WSJ report , which cited unnamed people familiar with the situation.

Huawei has come under scrutiny in the United States recently.

Intelligence agency leaders and others have said they are concerned that Huawei and other Chinese companies may be beholden to the Chinese government or ruling Communist Party, raising the risk of espionage.

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“The Permian will continue to grow and OPEC needs to learn to live with it,’’ said Mike Loya, the top executive in the Americas for Vitol Group, the world’s largest independent oil-trading house.

The U.S. energy surge presents OPEC with one of the biggest challenges of its 60-year history. If Saudi Arabia and its allies cut production to keep prices higher, shale will thrive, robbing them of market share. But because the Saudis need higher crude prices to make money than U.S. producers, OPEC can’t afford to let prices fall.
An infestation of dots, thousands of them, represent oil wells in the Permian basin of West Texas and a slice of New Mexico. In less than a decade, U.S. companies have drilled 114,000. Many of them would turn a profit even with crude prices as low as $30 a barrel.

So the cartel finds itself squeezed between the-sky’s-the-limit U.S. output and softer demand growth. The 15 members, and allies including Russia, Mexico and Kazakhstan, will discuss the possibility of their second retreat from booming American production in three years when they gather Dec. 6 in Vienna.

OPEC helped create the monster that haunts its sleep. After it flooded the market in 2014, oil prices crashed, forcing surviving U.S. shale producers to get leaner so they could thrive even with lower oil prices. As prices recovered, so did drilling.

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The Trump administration is considering tighter curbs on technology exports, a step that Deutsche Bank AG says would have a “profound and long lasting adverse impact” on relations between the U.S. and China.

A request for public comment, published Monday on the U.S. government’s Federal Register, asks if a list of new technologies that have national security applications -- from artificial intelligence to microprocessors and robotics -- should be subject to more stringent export-control rules. That would affect U.S. manufacturers as well as purchasers in China.

The news added to bearish sentiment in China’s stock market on Tuesday, with two manufacturers of surveillance equipment -- Hangzhou Hikvision Digital Technology Co. and Zhejiang Dahua Technology Co. -- leading large-cap losses.

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“You would think that companies want to add to productivity capacity but we really haven’t seen it,’’ said Priya Misra, head of global rates strategy at TD Securities USA. “If they view the economy as in the late stages of the expansion, then there isn’t a lot of confidence about the outlook and it is easier to buy back stock.’’

Despite strong incentives in the Republican tax plan for American executives to expand, invest and ultimately boost the U.S. economy’s growth potential, a lot of the debt companies are issuing appears to be motivated by something else.
Non-financial corporate debt stands at 45.6 percent of gross domestic product, near the highest in post-war record keeping. Despite that, non-residential investment -- a broad category in the national accounts that includes everything from office buildings to software -- has only been bouncing around the 13 percent of GDP range since 2012.

“When we think about business cycles and what ends them, you can always follow the leverage,’’ said Ellen Zentner, chief U.S. economist at Morgan Stanley & Co. “It is not a household issue this time, it is going to be corporate.’’

One corner of the corporate debt markets that’s ringing alarms is leveraged lending, or credits to highly indebted companies.

Globally, new issuance hit a record $788 billion last year, the International Monetary Fund said in a recent blog post, with the US market accounting for more than 70 percent of the total. Credit quality and investor protections have deteriorated, and some of the transactions are arranged specifically to extract cash for shareholders while loading a company’s balance sheet with debt. That can reduce management’s flexibility in an economic downturn, and forecasters expect U.S. growth to slow over the next two years.

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“The big event is going to be the one-on-one meeting with President Trump and President Xi at the G-20 down in Argentina. All this other stuff is just preparatory until that. That’ll set if there is going to be a real framework," he said at the ribbon cutting for Cheniere Energy Inc.’s new liquefied natural gas export terminal in Corpus Christi, Texas.
The U.S. and China are now discussing the agenda for the two leaders’ meeting on the sidelines of the Nov. 30-Dec. 1 Group of 20 summit in Buenos Aires and what a realistic outcome could be. When asked about a report that China this week had presented a list of possible concessions ahead of the talks, Ross said in an interview Thursday that everything leading up to the meeting is just “preparatory.”
The U.S. still plans to raise tariffs on Chinese imports in January with President Donald Trump and China’s Xi Jinping likely at best to agree to a “framework” for further talks to resolve trade tensions at an upcoming meeting, Commerce Secretary Wilbur Ross said.

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“We have to be thinking about how much further to raise rates, and the pace at which we will raise rates,” Powell said during a question and answers session Wednesday in Dallas moderated by Dallas Fed chief Robert Kaplan. The goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low.”
While generally upbeat about the U.S. economic outlook, Powell listed potential challenges including slowing demand abroad, fading fiscal stimulus and the lagged effect on the economy of the Fed’s eight rate increases since late 2015.
“Powell tried to come across as neutral, in our view, which may be perceived as dovish by the markets,” said Sonia Meskin, an economist at Standard Chartered Bank. “He opted to try to calm the markets, at least from the Fed’s side.”
“I do believe our economy can grow and grow faster,” Powell said.

The Fed chairman said officials are “looking really carefully” at how financial markets, the economy and business contacts are responding to rising rates.

The chairman also stressed that his move to press conferences following all eight of the Fed’s meetings in 2019 will help policy agility, and get markets away from the idea that the Fed only has the potential to change policy four times a year, lining up with the current press conference cycle.

"The markets definitely got in the habit of having us only move on press conference meetings,” Powell said. “Over time the market’s going to have to get used to that.”

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The U.K. and European Union are reported to have reached a provisional agreement over Brexit but before anyone gets too excited – or indeed, disappointed – there are big hurdles to overcome to get the draft deal approved on all sides.
Now, U.K. Prime Minister Theresa May has to get her Cabinet of ministers and then a majority of parliament to approve the draft deal – or what has, in typically bureaucratic fashion, been called a "technical agreement" between the U.K. and EU.
That's not likely to happen smoothly with both ends of the political spectrum — both pro-EU members of her cabinet and parliament as well as hard Brexiteers – expected to be unhappy with the terms of the draft deal.

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