FIG Topics of Interest



“We’re putting the trade war on hold,” Treasury Secretary Steven Mnuchin said Sunday after the two sides released a joint statement a day earlier. “Right now, we have agreed to put the tariffs on hold while we execute the framework.”
The truce is “little more than a brief de-escalation of tensions,” said Eswar Prasad, a trade policy professor at Cornell University and former head of the IMF’s China unit. “The fundamental differences on trade and other economic issues remain unresolved.”
During the talks, China and the U.S. agreed to “substantially” reduce the U.S. trade deficit in goods with China. Beijing promised to “significantly” increase purchases of U.S. goods and services, but there was no dollar figure attached, despite White House assurances that China would cave to its demand for a $200 billion annual reduction in the trade gap.
“As this process continues, the United States may use all of its legal tools to protect our technology through tariffs, investment restrictions and export regulations,” U.S. Trade Representative Robert Lighthizer said in a statement Sunday. “Real structural change is necessary. Nothing less than the future of tens of millions of American jobs is at stake.”
It’s “difficult to contemplate” how the two countries could cut their trade imbalance by $200 billion, said Victor Shih, a professor at the University of California in San Diego who studies China’s politics and finance.

“Even with a drastic reallocation of Chinese imports of energy, raw materials and airplanes in favor of the U.S., the bilateral trade deficit may reduce by $100 billion,” said Shih. “A $200 billion reduction would mean a drastic reduction in Chinese exports to the U.S. and a dramatic restructuring of the supply chain.”

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Why is there so little noise about the emerging oligopoly in one of the hottest elements on the periodic table, lithium?
Tianqi Lithium Corp. will pay $4.1 billion to buy Nutrien Ltd.’s 24 percent stake in Soc. Quimica & Minera de Chile SA, or SQM, in a deal that will entangle the biggest and fourth-biggest producers of the battery metal. The transaction could theoretically give Tianqi half of the board seats, though other major shareholders who’ve historically guarded their interests have opposed such a path.
Here’s how the lithium carbonate market is structured at present: North Carolina-based Albemarle Corp. is the market leader, with an 18 percent share, followed by Jiangxi Ganfeng Lithium Co. on 17 percent; SQM on 14 percent; and Tianqi on 12 percent. Other players have the 39 percent or so that remains – the largest among them being FMC Corp., which is soon to offer its shares to whoever wants them in a planned initial public offering.
That in some ways understates how connected these players are. The single biggest mine deposit is a joint venture between Albemarle and Tianqi, the Greenbushes mine in Australia, which alone accounted for about 35 percent of global lithium carbonate-equivalent supply last year. 1   Albemarle’s other major deposit is the Atacama brine lake, adjacent to SQM’s deposits in Chile.
On top of that, Ganfeng and Tianqi, while both technically independent private companies, are strategically important businesses operating in the China of 2018. Tianqi Chairman Jiang Weiping is a delegate to China’s National People’s Congress, according to the company’s latest annual report. Ganfeng Chairman Li Liangbin has been a member of the standing committee to the People’s Congress in Xinyu city, where the company is based, according to its IPO prospectus.

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For the first 19 weeks of 2018, U.S. railroads reported cumulative volume of 4,879,984 carloads, up 1.1 percent from the same point last year; and 5,158,588 intermodal units, up 5.9 percent from last year. Total combined U.S. traffic for the first 19 weeks of 2018 was 10,038,572 carloads and intermodal units, an increase of 3.5 percent compared to last year.

For this week, total U.S. weekly rail traffic was 550,029 carloads and intermodal units, up 5.8 percent compared with the same week last year.

Total carloads for the week ending May 12 were 267,196 carloads, up 5.3 percent compared with the same week in 2017, while U.S. weekly intermodal volume was 282,833 containers and trailers, up 6.3 percent compared to 2017.

Seven of the 10 carload commodity groups posted an increase compared with the same week in 2017. They included coal, up 7,347 carloads, to 81,523; nonmetallic minerals, up 5,714 carloads, to 42,383; and chemicals, up 1,128 carloads, to 32,431. Commodity groups that posted decreases compared with the same week in 2017 were motor vehicles and parts, down 1,440 carloads, to 16,915; miscellaneous carloads, down 657 carloads, to 9,189; and metallic ores and metals, down 326 carloads, to 23,875.

North American rail volume for the week ending May 12, 2018, on 12 reporting U.S., Canadian and Mexican railroads totaled 372,423 carloads, up 5.3 percent compared with the same week last year, and 371,131 intermodal units, up 5.2 percent compared with last year. Total combined weekly rail traffic in North America was 743,554 carloads and intermodal units, up 5.2 percent. North American rail volume for the first 19 weeks of 2018 was 13,535,733 carloads and intermodal units, up 3.2 percent compared with 2017.

Canadian railroads reported 84,175 carloads for the week, up 7.9 percent, and 70,827 intermodal units, up 4.2 percent compared with the same week in 2017. For the first 19 weeks of 2018, Canadian railroads reported cumulative rail traffic volume of 2,777,892 carloads, containers and trailers, up 3.1 percent.

Mexican railroads reported 21,052 carloads for the week and 17,471 intermodal units. Cumulative volume on Mexican railroads for the first 19 weeks of 2018 was 719,269 carloads and intermodal containers and trailers.

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“We do think this hiking cycle is quite well advanced,” Sydney-based Mead said at the Bloomberg Invest summit in Sydney. “We also know that the backdrop of the U.S. economy has been pretty strong and going for a long time. At some point we will find these high yields will become an impediment for growth.”
The yield on 10-year Treasuries has topped 3 percent and reached the highest since 2011 on Tuesday as concerns about inflation and the pace of Fed rate hikes increased. While there has been a growing consensus for higher rates this year, debate has shifted to the extent of the advance with JPMorgan Chase & Co.’s Jamie Dimon and Franklin Templeton suggesting yields are headed toward 4 percent.
“Nothing is pound-the-table cheap,” but rising yields mean investors can gradually reduce their underweight bond positions, Mead said.

Mark Delaney, the chief investment officer of AustralianSuper Pty, the nation’s largest superannuation fund, said he was thinking about buying bonds again after selling almost all holdings last year.
“We sold almost all our bonds in 2017, but now they’re a percent higher -- a percent plus, a bit higher -- we’re starting to think about whether or not we should start closing those short positions,” Delaney said at the summit.

Jeffrey Johnson, head of Asia-Pacific fixed income at Vanguard Investments Australia, said inflation was still seen as anchored. Powerful forces such as demographics, globalization and technology should keep a cap on yields, Johnson told the summit.
Fair value for U.S. 10-year yields would be 3 percent to 3.25 percent, Johnson said. Vanguard has seen evidence of investors getting back into fixed income to take advantage of the higher yields, he added.

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With the spread between 5- year and 30-year Treasuries narrowing last week to the lowest levels in more than a decade, here are some of the Fed's recent comments...

A Fed study released April 3 found that an inverted yield curve remains a powerful signal of a looming recession and that is still the case even if the current ultra-low level of U.S. interest rates are taken into account.

America's budget deficit and unemployment rate are heading in opposite directions — something that's never happened during post-World War II peacetime and could cause a significant jump in interest rates.

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The idea of bringing down U.S. drug prices is universally popular. The hard choices, trade-offs and political fortitude needed to actually do it, however, are a harder sell. So here we are, with a drug-pricing plan so toothless that biotech shares soared as it was unveiled by President Donald Trump on Friday afternoon.
Some of Trump’s initiatives will be only mildly impactful, like changes to the Medicare Part D drug benefit that might slightly lower costs to the government and seniors. Other proposals are vague and may never be pursued, like changes to the drug-rebate system. Still others are nonsensical political theater, like the notion that other countries can be compelled to raise drug prices, and that this will somehow lower U.S. prices.
The few immediate  actions outlined in the plan — like ending a rule that makes it hard for pharmacists to steer patients to lower-priced options and forcing drugmakers to include the list price of drugs in advertisements — will be visible in a campaign year and allow the administration to claim it is taking action. But they won’t actually stop soaring drug spending.
Trump’s plan could have had more teeth if he followed through on a policy he once endorsed, and has been criticized for not pursuing: allowing Medicare to directly negotiate drug prices. But here again is another example where trade-offs would be required. Nine out of 10 Americans are in favor of giving the government the power to negotiate, according to a Kaiser poll. But that number would drop precipitously if they knew what the government would have to do in order to make the policy effective.
To gain any leverage with drugmakers, the government would need to be able to refuse Medicare coverage of certain medications because they are too expensive, and firmly steer patients to cheaper treatments. That is, the more restrictive the government is allowed to be, the bigger the potential impact on prices. But enacting such restrictions would be enormously unpopular. It’s one thing when it’s a private company making you jump through hoops, it’s another entirely when Uncle Sam is telling your grandmother she can’t have a potentially lifesaving medicine.

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Israeli Prime Minister Benjamin Netanyahu issued a statement Thursday saying: "Iran crossed a red line. We responded accordingly. The IDF carried out a very wide-ranging attack against Iranian targets in Syria." He added: "Whoever hurts us — we will hurt them sevenfold.
Israel bombed more than 35 sites in Syria — both Iranian and Syrian — early Thursday in response to a rocket attack it said was launched by Iran just after midnight local time.
Amid a rapid escalation of regional tensions, the strikes have thrust a simmering shadow war out into the open.
The Israeli Defense Forces (IDF) claimed it struck nearly all of Iran's military infrastructure in Syria, dramatically ramping up hostilities between the two longtime adversaries that until now were largely fought out by proxies.
Ahmad Majidyar, director of the IranObserved Project at the Middle East Institute, effectively summarized the new developments: "While neither side wants an all-out war, miscalculation and overreaction may culminate in a more dangerous situation, triggering a wider war between the two arch-enemies and thrusting the Levant region into more chaos and instability."
Israeli missiles targeted an Iran-linked army base south of Syria's capital of Damascus. Israeli strikes had killed at least seven Quds Force advisers in the weeks prior to Thursday's strike, but until this week Tehran was notably muted in its response — likely owing to the embarrassment of an Israeli blow to its forces, and a reluctance to trigger greater conflict. Now, however, analysts say Iran is less likely to hold back.
"We should be prepared for continued airstrikes and exchange of fire along the border," said Ryan Turner, senior risk analyst at PGI group, adding that both terrorist and cyber-attacks targeting Israeli interests cannot be discounted. Meanwhile, Israel, emboldened by the Trump administration and tacit support from Gulf monarchies, will likely step up its aerial campaign against Iranian targets.
U.S. Ambassador James Dobbins, a senior fellow at RAND Corporation who served in crisis management posts for the Clinton, Bush and Obama administrations, agreed, adding that a full-scale war is still less probable. "Iran and Israel are likely to continue clashing in Syria," Dobbins told CNBC. "Strikes from Israel all the way to Iran or vice versa seem less likely, although possible if the local conflict becomes more intense."

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How much would it cost to keep the peace on the Korean Peninsula? Around $2 trillion over ten years.
That’s according to Stephen Jen and Joana Freire at Eurizon SLJ Capital Ltd. in London who estimated what resources would be needed to ensure a denuclearized North Korea is economically viable. They drew on the example of Germany’s unification, noting that transfers from the West to East totaled more than 1.2 trillion euros, or around 1.7 trillion euros using today’s value.
By population, the relative size of North Korea to South Korea is meaningfully larger than East Germany was to West Germany. North Korea is also much much underdeveloped compared to East Germany, which had a well established industry base.
"Given the threat presented by the nuclear arsenals, Mr Kim Jong Un is in a position to demand a very large financial commitment from the rest of the world to secure complete denuclearisation," Jen and Freire wrote in a note. "We stress that we are not arguing that North Korea should or will demand such a large financial assistance. We are merely thinking out loud about what the order of magnitude of that figure might be."

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U.S. President Donald Trump’s plan to withdraw from the 2015 accord to curb Iran’s nuclear program poses fresh uncertainty although Bloomberg Economics reckons that and similar supply shocks account for half of oil’s recent rise.
1. What does it mean for global growth?

The world economy is enjoying its broadest upswing since 2011 and higher oil prices would drag on household incomes and consumer spending, but the impact will vary. Europe is vulnerable given that growth and industrial activity already are moderating and many of the region’s countries are oil importers. China is the world’s biggest importer of oil and could expect an uptick in inflation -- prices already are tipped to increase 2.3 percent in 2018 from 1.6 percent in 2017. For a sustained hit to global growth, economists say oil would need to push higher and hold those levels. Seasonal effects mean energy costs often increase during the first half of the year before easing. Consumers can also switch energy sources to keep costs down, such as biofuels or natural gas.
2. How will Iran impact the the market?
Oil prices have risen 14 percent this year -- half of this increase reflects stronger global demand, a Bloomberg Economics model suggests. The rest is likely due to heightened tensions with Iran and other supply shocks. The return of U.S. sanctions could crimp Iranian oil exports, but the global supply shock might be mitigated by increased pumping elsewhere, according to the analysis. Here’s a chart.
3. Who wins from higher oil prices?
Most of the biggest oil-producing nations are emerging economies. Saudi Arabia leads the way with a net oil production that’s almost 21 percent of gross domestic product as of 2016 -- more than twice that of Russia, which is the next among 15 major emerging markets ranked by Bloomberg Economics.
Other winners could include Nigeria and Colombia. The increase in revenues will help to repair budgets and current account deficits, allowing governments to increase spending that will spur investment.
4. Who loses?
India, China, Taiwan, Chile, Turkey, Egypt and Ukraine are among those on the worry list. Paying more for oil will pressure current accounts and make economies more vulnerable to rising U.S. interest rates. Bloomberg Economics has ranked major emerging markets based on vulnerability to shifts in oil prices, U.S. rates and protectionism.
Analysts at RBC Capital Markets created an “oil sensitivity index” to judge the economies most exposed in Asia. They warn that Malaysia, Thailand, China and Indonesia could face the most volatility from an oil-price spike.
5. What does it mean for the U.S. economy, the world’s biggest?
A run-up in oil prices poses a lot less of a risk to the U.S. economy than it used to, thanks to the boom in shale oil production. The old rule of thumb among economists was that a sustained $10 per barrel rise in oil prices would shave about 0.3 percent off of U.S. GDP the following year. Now, says Mark Zandi, chief economist at Moody’s Analytics, the hit is around 0.1 percent. And that all but dissipates in subsequent years as shale oil production is ramped up in response to the higher prices. The Baker Hughes U.S. rig count already is at a three-year high. 
As the U.S. nears the tipping point between net oil importer and exporter, some forecasts are less upbeat. Gregory Daco, the U.S. chief for Oxford Economics, estimates that if WTI crude prices average $70 a barrel this year, U.S. growth will lose half the 0.7 percentage point gain it would otherwise earn from tax cuts passed earlier in 2018.
Oil-producing states such as North Dakota, Texas and Wyoming should benefit from higher extraction activity, though Daco warns that productivity enhancements could limit that upside. Poorer households have the most to lose. They spend about 8 percent of their pre-tax income on gasoline, compared to about one percent for the top fifth of earners.
6. Will it lead to higher inflation around the world?
Energy prices often carry a heavy weight in consumer price gauges, prompting policy makers including those at the Fed to focus simultaneously on core indexes that remove volatile food and energy costs. But a substantial run-up in oil prices could provide a more durable uptick for overall inflation as the costs filter through to transportation and utilities and other associated industries.
7. What does it mean for central banks?
If stronger oil prices substantially boost inflation, central bankers on balance will have one less (big) reason to keep monetary policy on hold while the Fed moves ahead in its tightening cycle.

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The prospect of the U.S. withdrawing from the landmark seven-party agreement to limit Iran's nuclear program, formerly known as the Joint Comprehensive Plan of Action (JPCOA), has ramped up energy market fears of an imminent supply shock.

"The geopolitical consequences of a possible dismantling of the JCPOA would likely to play a larger and long-lasting role in pushing oil prices higher than short-term policy uncertainty," Michael Cohen, Barclays director of energy market research, said in a research note published Monday.

Trump is likely to either announce he will not be renewing a waiver on Iranian sanctions or reaffirm his firm opposition to the global pact, Barclays analysts said. However, regardless of Tuesday's announcement, they predicted the current Iran nuclear deal would "not survive under President Trump."

"And in the next couple of years, this more hawkish foreign policy could fuel already elevated tensions in the Middle East, specifically in Iraq, Syria, and Yemen, as the hostilities between Iran and Saudi Arabia escalate," Cohen added.

Iran's oil production has rebounded to nearly 4 million barrels a day since world powers opted to ease sanctions over its nuclear program. However, external observers have warned that re-imposing sanctions could reduce Iranian oil exports by up to 1 million barrels a day — just the type of supply shock that could be price supportive.

"We would expect an inevitable jump in oil prices should the sanctions return," Cliff Kupchan, chairman of Eurasia Group, a Washington-based political consulting firm, said in a research note.

"We return to the possibility that the president's looming verdict may — to a significant extent — be a negotiating ploy and hence should not be considered a final verdict on the deal… Trump is regularly underestimated, and it's not over."


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