FIG Topics of Interest



On Aug. 1, the U.S. Congress approved legislation granting sweeping powers to the Committee on Foreign Investment in the U.S. (CFIUS), key among which are two jurisdictional upgrades. First, CFIUS can now review not just deals that involve a change of control of an American company but also those in which a foreign entity is acquiring any influence. The law also expands the definition of a U.S. business to include any company or individual “engaged in interstate commerce,” effectively giving the regulator oversight of any enterprise that operates, however marginally, in the U.S.
From Beijing to Brussels, governments are treating corporate mergers as weapons of industrial policy. Deals that may have passed muster on competition grounds are being weighed—and, increasingly, thwarted—for the risks they may pose to a country’s security or strategic industries. Beyond inflicting pain on speculators, the incipient change in stance could upend globe-trotting capitalism as we’ve come to know it. “There have been nationalist tendencies before, but this is the first time M&A is really being impacted by it,” says James Del Favero, a co-founder of investment bank Ardea Partners LLC and former head of cross-border mergers and acquisitions at Goldman Sachs.

In May, the European Union voted to introduce a screening framework for foreign investment that gives the 28-nation bloc a single voice to overrule, if necessary, a member state’s interests. “Without succumbing to protectionism, it is time to show that Europe is not naive in these times of globalization,” says Franck Proust, a member of the European Parliament. “If it wants to preserve a favorable climate for investments—sources of growth, jobs, and innovation—it has to protect European assets.”

Some of the EU’s individual members also are breaking with decades of open-door economic policy to ensure their national champions remain just that. In August, German lawmakers blocked a takeover of machine tool manufacturer Leifeld Metal Spinning AG by a Chinese investor, the first time the country has vetoed a deal on national security grounds. In the U.K., which since the 1980s has styled itself as the take-all-comers bazaar of global commerce, politicians are debating the nation’s first-ever foreign investment controls for mergers.

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White House budget director Mick Mulvaney told CNBC on Thursday President Donald Trump won't shut down the government over the lack of border wall funding in a newly passed House spending package.

"We've decided to have that discussion after the election," Mulvaney said on "Squawk Box."

Hours before Wednesday's House spending bill vote, Trump said, "We're going to keep the government open."

Asked if the president can be taken at his word not to close the government, Mulvaney said, "I think so."

With passage now in the House and Senate, the president needs to sign the legislation before federal funding lapses at 12:01 a.m. ET Monday.

"What you saw this here is a move in the right direction," Mulvaney said. "The House and the Senate actually passed some appropriation bills, ... so it sounds like they learned to govern again."

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FOMC: /PREVIEW: Multiple dealer opinions on today's FOMC annc, .25bps

universally expected, most with an additional hike in December; particular attn

to forwad guidance and addition of 2021 dot in SEP today.

- TD Securities: Set to hike today w/total of four exp for 2018. "Later dots

will show most support hiking beyond neutral, while median longer-run dot could

drift down to 2.75% thanks to newly-added participants. This risks modifying the

statement language to suggest "policy remains somewhat accommodative." Risks

should remain balanced, with Chair Powell downplaying some of the downside risks

that have preoccupied markets of late."

- SocGen: Expects FOMC annc 25bps hike today, particular attn to forward

guidance. "In our view, the dot plot will continue to project another hike in

December, three more next year, one in 2020, and it will add one in 2021. We

anticipate minimal changes to the statement."

- BofAML: Fed is set to hike "bringing the Fed funds rate to a range of

2.0-2.25%." On inaugural 2021 dot: BofAML expects it to "be a bit above 2020.

The long-run dot threatens to move up to 3.0%. Fed communications should support

flatter curve over time, USD expecting hawkish Fed. We think it is likely to

communicate that policy is no longer accommodative by revising or simply

removing that language in the statement."

- BNP Paribas: "From "'gradual' to 'nimble'". Rate hike "likely...with few

changes in the statement and near-term forecasts. The press conference should

hint at a December hike." While "economy continues to hum" and "inflation moves

towards the Fed's 2% target...China tariffs pose downside risks to Fed forecasts

for growth and upside risks to inflation in 2019."

- RBC: Fed is set to hike rates today and again in December with additional four

hikes in 2019. RBC doesn't have an "official forecast" beyond 2019, but can

"easily see the Fed continuing the hiking cycle into 2020 before it (likely)

comes to an end." RBC posits the Fed "expects slightly more than one additional

hike in '20 but our sense is, with several doves seemingly becoming 'centrists'

of late, w/relatively low hurdle to get median up a bit" from 3.4% to 3.6%

possible, allowing Fed to "show rates on hold in 2021 at that level."

- RBS NatWest: Expect Fed to hike while signaling "further gradual rate hikes

ahead (including December). More important is what happens with policy once

rates reach the neutral level. Unfortunately, we expect little clarity with

respect to that question at this time." RBC expects "risks to the economic

outlook to again be characterized as 'roughly balanced'" while the Fed "could

acknowledge the potential impact of Hurricane Florence."

- JP Morgan: Expect Fed to hike "with a similar increase in the IOER rate",

followed by three more in 2019 and one in 2020. "For the new 2021 forecast we

look for midpoint of the funds rate target to be about unchanged at 3.375%. The

median longer-run dot, 2.875% in June, we anticipate to be either unchanged or

drift up to 3.0%."

- BNY Melon: Fed hike a "foregone conclusion" on the back of "strong economic

data". On dots, the current "2.375% median (four hikes) for this year has a

central tendency," while the "median 2019 projection calls for three additional

hikes, with one additional hike in 2020 that will bring the funds rate to 3.375%

by the end of the current hiking cycle."

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"Fed funds increases in September and December are as certain as certain can be," John Donaldson, director of fixed income at Haverford Trust Co., wrote in response to the survey. "Their real challenge starts after the first increase in 2019, which will bring the rate to 2.75 percent, or finally back to even to inflation."
A full 98 percent of the 46 respondents, who include economists, fund managers and strategists, see the Fed hiking rates a quarter point at its meeting this week to a new range of between 2 and 2 ¼ percent. And 96 percent believe another quarter-point hike is coming in December.
Respondents see the funds rate rising by another two quarter-point hikes (50 basis points) in 2019, which would bring it to a range of 2.75 to 3 percent. After that, divisions set in, with about half the group seeing a third hike in 2019.

About 60 percent of the group sees the Fed raising rates above neutral to slow the economy. The average respondents see the funds rate eventually ending this hiking cycle at 3.3 percent.

"This means that the U.S. bond market will reach a decision point sometime in the next year, when market participants will have to decide whether the Fed will go beyond current market pricing,'' said Tony Crescenzi, executive vice president at PIMCO. "If and when it does, U.S. Treasuries will move higher."

A fifth of the group say a "fed policy mistake" is one of the biggest threats facing the expansion, second only to trade protectionism.

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Investments contributed to 44 percent of China's nominal GDP in December 2017, compared to about 20 to 25 percent for countries like the United States, Japan and Germany, according to figures compiled by economic data provider CEIC.

China's fixed asset investment is slowing, however, with investment growth falling to a record low in August. Economists including Nicholas Lardy from the Peterson Institute for International Economics, however, warn against paying too much attention to the historically low figure as China is currently revising the way it measures fixed asset investment.

Still, as the trade war escalates, it will not be easy for the Chinese government to use public spending to boost investments due to its mounting debt.

The world's second-largest economy had a relatively stable level of debt until the financial crisis in 2008 when it spent a whopping 12.5 percent of its GDP to stimulate the economy.
The country had encouraged loans to boost economic growth, with Chinese banks extending a record 12.65 trillion yuan ($1.88 trillion) in loans in 2016. That credit explosion stoked worries about financial risks, so authorities in 2017 pledged to contain the rapid build up in debt.

Since then, Chinese debt-to-GDP has steadily grown to about 250 percent — or about $28 trillion, according to DBS and CEIC.

However, the Institute of International Finance has put China's debt at more than 300 percent of its GDP.

Chinese authorities had been trying to rein in the country's rising debt, with China's state-owned banks told in April to stop lending to local governments. But as the trade war drags on, China appears to be using investments to boost the economy again.

The National Development and Reform Commission, a top Chinese economic regulator, announced earlier this month that it aimed to promote infrastructure investment.

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Earlier this year, Governor Dannel Malloy signed a law that creates a way for owners of so-called pass-through businesses, such as partnerships, to take bigger federal deductions to absorb the hit from the tax law’s new $10,000 SALT deduction limit. Buried in the provision is a way to further reduce the rate applied to carried interest.
For managers at some of Connecticut’s big funds such as Viking Global Investors, Lone Pine Capital, Stone Point Capital and Silver Point Capital, the measure could translate to hundreds of thousands, or even millions, of dollars in federal tax savings on carried interest. Representatives for the firms didn’t respond to requests for comment.

The new tax “could create a significant benefit,” said Joseph Pacello, a tax partner in the asset management group at BDO USA. Pacello said the carried interest break is currently being discussed by fund managers in Connecticut and their accountants.

The pass-through tax, signed into law by Malloy in May, set a mandatory 6.99 percent levy -- the state’s top marginal individual income tax rate -- on pass-through entities, whose income is reported on owners’ personal returns and taxed at individual rates. Pass-through owners then get a state credit equal to about 93 percent of the owner’s share of tax paid by the business. They also get a full deduction for the levy as a business expense on their individual federal returns, since those are still unlimited.

The workaround, retroactive to Jan. 1, 2018, effectively assesses a state tax on the business that the owner can turn into a federal deduction.

For fund managers who earn carried interest -- typically 20 percent of a fund’s profits -- the pass-through entity tax has benefits that go beyond SALT.

Carried interest is eligible for the long-term capital gains rate of 20 percent, instead of facing ordinary income tax rates that now top out at 37 percent. (Federal law adds an additional 3.8 percent surcharge tied to Obamacare to the capital gains rate.) Under the old tax regime, assets had to be held for one year to qualify for the lower rate -- the new law sets a three-year holding period.

To compute the Connecticut levy, fund managers can use two methods. The standard way involves tallying up an entity’s income from sales and services within the state, or in the case of fund managers, annual management fees paid by investors who are Connecticut residents.

An alternative method includes any capital gains, dividends and interest earned by Connecticut residents. Managers who choose that method can include carried interest and reduce the long-term capital gains rate of 20 percent by about 1.4 percentage points, according to Bloomberg calculations supported by Michael Spiro, chair of the tax group at Finn Dixon & Herling in Stamford, and Ivan Mitev, a tax lawyer at Pillsbury Winthrop Shaw Pittman.

Tax Examples

Before the pass-through entity tax, a fund manager with $1 million in management fees would have owed Connecticut state taxes of $69,900 and federal income taxes of $370,000 assuming top individual rates, according to an example by law firm Kleinberg, Kaplan Wolff & Cohen.

With the new workaround, the manager could reduce her federal tax bill by almost $26,000. She would be able to reduce her adjusted gross income by $69,900, bringing it down to about $930,000 -- taxed at 37 percent, that’s a federal tax bill of about $344,000. And she would receive a 93 percent credit on her state tax bill for the $69,900.

In an alternate example provided by Kleinberg Kaplan, if a manager earned $1 million -- but only in carried interest -- she would save almost $14,000. That’s because a 20 percent rate applied to the $930,000 would create a tax bill of $186,000, compared to $200,000 that would have been owed on the full $1 million.

Managers who are able to combine their management fees and their carried interest would be able to maximize their savings. “It behooves funds to explore this,” Spiro said.

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Canadian Foreign Minister Chrystia Freeland, after her first in-person meeting in more than a week with U.S. Trade Representative Robert Lighthizer in Washington on Wednesday, said talks are still productive. Negotiators need to do more work, Freeland told reporters, adding she’ll meet Lighthizer again in the afternoon.

The two countries remain at odds on core issues, including dairy and dispute panels. A deal is unlikely this week without major movement, the people said, speaking on condition of anonymity as negotiations continue. The talks could extend into next week, and several deadlines have been missed so far. A Canadian official had said Thursday was the likely deadline to reach a deal in order to convert it to legal text by the end of the month.
“We’ve been very clear that we’re interested in what could be a good deal for Canada, but we’re going to need to see a certain amount of movement in order to get there and that’s certainly what we’re hoping for,” Trudeau told reporters Wednesday in Ottawa.
“It is growing increasingly unlikely that you can get text to the Congress by Sept. 30,” said Jennifer Hillman, a professor of law at Georgetown University and former general counsel to the Office of the U.S. Trade Representative. It’s even more unlikely to proceed quickly with only Mexico, she said. “Canada does still have some leverage.”
Scalise, the House majority whip, said if Canada does not “cooperate” then Congress would “consider options about how best to move forward,” though he didn’t specify how.

“There is a growing frustration with many in Congress regarding Canada’s negotiating tactics,” Scalise said in the statement.

“I think that if all three countries are in and all signed up, there’s a much higher likelihood this gets passed,” Bruce Heyman, a former U.S. ambassador to Canada under Barack Obama, said Tuesday on BNN Bloomberg television. There’s no sign a Mexico-only deal can be passed by Congress, he said, while shrugging off the significance of Scalise’s statement. “I think Steve Scalise is carrying water for USTR,” he said.

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Credit traders at some of the world’s largest banks are convinced hedge funds and brokers have penetrated their members-only club. The claim -- based on interviews with more than 16 bankers, including seven who head trading desks -- is that rivals and even clients are now accessing information from trading platforms that have long been the exclusive domain of the banks.
These wholesale trading venues are operated by firms known as interdealer brokers. And according to practices developed over decades, they were used solely by big banks that have served as the primary market makers for institutional investors looking to trade corporate bonds and other debt.
The platforms allow the banks to anonymously unload unwanted positions or source bonds from each other, as well as gain pricing intelligence. Effectively, this has helped the banks maintain a significant amount of control over who gets what and how much is paid in a marketplace that now trades more than $30 billion a day.
But post-crisis regulations that curbed the banks’ ability to take risks -- while ushering in a wave of new trading venues -- diminished the banks’ role. What has followed is a brutish world where bankers, investors and smaller brokers jostle for influence and profits.

“The banks are trying to defend their turf and maintain the advantages they used to enjoy,” said Suki Mann, a debt-market analyst who previously ran credit strategy in Europe for Societe Generale SA and UBS Group AG. “But they’re fighting a losing battle.”

Caught in the middle of all of this are the interdealer firms, such as TP ICAP Plc, BGC Partners Inc. and Cie. Financiere Tradition SA. They’re fighting for a share of a shrinking pie while trying not to alienate their primary clients -- the banks.

Credit traders at 11 of the world’s largest banks -- including some that head trading desks -- said that they’re convinced that pressures faced by the interdealer brokers to boost commissions is prompting them to let investors and brokers onto platforms where dealers trade -- giving them access to a bigger universe of product and prices.

The traders aren’t claiming any laws are being broken. But they say that -- in addition to their own profits -- it’s threatening long-standing conventions that have helped maintain market integrity and liquidity. One senior trader at a French lender said banks often try to buy or sell bonds for clients in the interdealer market, and if those investors are also present on the platforms then their ability to trade will decrease.

The tensions emerged after new rules intended to prevent another financial crisis forced banks to pull back from some risky trading activities. The regulations also made it costlier for them to facilitate trades by holding debt on their own balance sheets or maintaining large warehouses of securities.

As the banks’ roles were reduced, that allowed others to step in -- namely smaller brokerage firms that simply match buyers and sellers without taking assets on to their balance sheets. Investment firms, like asset managers and hedge funds, have also increased trading among themselves since they can no longer rely on deposit-taking giants to always help them enter or exit a trade.

“It’s not a very pleasant time, whether you’re in a bank or a hedge fund,” said Derrick Herndon, who has run credit businesses in New York and London for Credit Suisse, Toronto-Dominion Bank and UBS Group AG. “Both sides are pointing at each other, but it’s a deeper issue than banks just don’t have market clout the way they used to.”

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NAHB Housing Market Index (exp 66 v. 67 prior) 0900 hrs cst
4-week bill auction ($45b)

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"The U.S. side insisted on imposing tariffs, which has brought new uncertainty to the bilateral negotiations," the commerce ministry statement said. "We hope that the U.S. side will recognize the negative consequences of such acts and take convincing measures to correct them in a timely manner."
The foreign ministry said in a separate briefing that it would announce counter-measures at an appropriate time without elaborating.

In a sign of how Chinese business are girding for a protracted dispute, Jack Ma, executive chairman of Internet giant Alibaba Group Holding Ltd., said the trade war could last for 20 years. It is "easy to launch a war but difficult to stop a war," he said at the company’s annual investor day in Hangzhou.
On a panel at meetings of the World Economic Forum in Tianjin, Fang Xinghai, vice chairman of China’s Securities Regulatory Commission, said China won’t be pressured by Trump’s trade tactics and talked up the economy’s strength. While he estimated a negative hit to China’s GDP growth of about 0.7 percentage points if the U.S. goes ahead with tariffs on all China exports to the U.S., Fang also said he’s confident that relations between both countries can normalize and said he hopes both sides can negotiate on an equal basis.

“It is good for the U.S. economy to have good relations with China and good for the rest of the world,” he said. “President Trump, as shown in the North Korean affair, is able to revert himself very quickly. I think we have to take that into account.”

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