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David Fuller and Eoin Treacy's Comment of the Day
Category - Global Middle Class

    On Target November 6th 2019

    Thank to Martin Spring for this edition of his letter which may be of interest. Here is a section on the Dollar:

    Are we about to see a “currency pact” between the US and China? Investment bank Jefferies’ Hong Kong-based Christopher Wood sees it as a possible significant development in the difficult ongoing trade negotiations between the two countries.

    It could give Donald Trump “a face-saving ‘out’ in terms of declaring victory in negotiations, where he has clearly over-estimated his leverage, for the simple reason that the Chinese leader has more tolerance to take pain than does America’s.”

    A currency agreement based on a Chinese commitment not to engage in a competitive devaluation of its renminbi makes sense as both Washington and Beijing want the same thing. Neither wants a stronger dollar and a weaker yuan.
    Beijing may see such an agreement as a way at least to end an escalation of the trade war or even to end it. It has no desire to see a major devaluation against the dollar. That would encourage accelerating capital outflow – “the Achilles heel of China’s command economy” -- at a time when such pressures are rising because wealthy citizens are keen to achieve international diversification. The outflow reached about $240 billion in the 12 months to the second quarter.

    Devaluation would also make Chinese consumers poorer in dollar terms, undermining the policy of seeking to make the economy more driven by domestic consumption. And it would undermine the current successful policy of attracting foreigners to invest in China’s stock and bond markets.

    “The last thing China needs right now is a further sharp appreciation of the US dollar – and that also seems the last thing Trump wants.”  

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    Abe, Moon Break Ice After Worst Japan-South Korea Fight in Years

    This article from Bloomberg may be of interest. Here is a section:

    Moon and Abe shared the view that the relationship between South Korea and Japan is important and re-affirmed in principle that issues between the two nations should be resolved via dialogue, the presidential office said in a text message. Abe conveyed Japan’s “basic stance” on bilateral issues in his exchange with Moon, the Tokyo-based Kyodo News agency said separately, citing the Japanese foreign ministry.

    The brief, 11-minute meeting at the Association of Southeast Asian Nations summit in Bangkok came as a long-simmering feud escalated into a trade-and-security dispute, leading to boycotts of Japanese imports and the decision to scrap an intelligence-sharing pact. The encounter followed a break-through meeting last month between Abe and South Korean Prime Minister Lee Nak-yon.

    Moon proposed high-level talks, if needed while Abe said every effort should be made to resolve the feud, Moon’s office said. Abe last met Moon in September 2018 and passed up a chance to meet him for formal talks during Group of 20 events in Osaka in June.

    The remarks were the most positive yet since South Korean courts issued a series of rulings last year backing the claims of Koreans forced to work for Japanese companies during the country’s 1910-45 occupation of the Korean Peninsula.

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    Germany Hopes for Positive Outcome for EU-U.S. Trade Talks

    This note by Birgit Jennen for Bloomberg may be of interest: 

    Germany is hopeful for a positive outcome in trade talks between the U.S. and the EU, Economy Ministry spokeswoman Katharina Grave says Monday in a regular government press briefing.

    “We need less, not more tariffs,” she said
    The government has taken note of comments from U.S. Commerce Secretary Wilbur Ross that tariffs may not be levied on autos imported from the EU
    NOTE, Nov. 3: U.S. May Not Need to Put Tariffs on European Cars, Ross Says

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    Pound Drops as U.K. Lawmakers Back Brexit Deal, Reject Timetable

    This article by Charlotte Ryan for Bloomberg may be of interest to subscribers. Here it is in full:

    The pound weakened after U.K. lawmakers rejected Prime Minister Boris Johnson’s plan to fast-track his Brexit accord through parliament.

    Britain’s currency dropped against all of its major counterparts, but the losses were contained after the government won an initial vote on the deal. Johnson opened the door to a short extension to his Oct. 31 deadline, saying he would pause legislation and go back to the European Union, after earlier threatening to throw out the deal if lawmakers rejected his plans.

    “For now it seems the market is still generally expecting this is a setback, but not a fatal setback, to a negotiated Brexit,” said Jeremy Stretch, head of G-10 currency strategy at Canadian Imperial Bank of Commerce. “There hasn’t been a rapid uptick in no-deal pricing at this point,” he said, referring to a scenario where the U.K. would leave the EU with no divorce deal.

    The U.K. currency had rallied more than 8% from September’s low as Johnson secured an agreement with the EU and then lawmakers then forced him to request an extension to the Oct. 31 deadline, reducing that no-deal risk.

    Sterling dropped as much as 0.7% after the votes to $1.2869, after rallying Monday to touch $1.3013, the strongest level since May. Against the euro, it fell 0.4% to 86.39 pence.

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    Monthly Economic Bulletin

    Thanks to a subscriber for this report from Krungsri Research focusing on South East Asia. Here is a section:

    Vietnam’s economy expanded 7.3% YoY in 3Q19, the strongest growth in three quarters. In the nine months to September 2019, the economy expanded 7.0%.

    In addition, the central bank recently cut policy interest rate by 25bps to 6.0%, the first cut since October 2017. This would reduce cost of funds, increase liquidity, and support growth in consumption and investment—which together account for around 100% of GDP.

    For the rest of the year, the economy will face challenges from a high-base GDP growth rate and rising external pressures from slowing global trade and the US-China trade war. However, Vietnam has resilient domestic demand and authorities have helped to support demand by cutting key interest rates. Hence, we forecast Vietnam’s economic growth at 6.6-6.8% for this year.

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    Has Arlene Foster Finally Overplayed Her Hand?

    This article by Therese Raphael for Bloomberg may be of interest to subscribers. Here is a section:

    The Brexit ultras in Johnson’s party, known as the Spartans, may be unionists, but their interests and those of the DUP have never been fully aligned. The Spartans want the hardest Brexit possible, and that’s their ultimate priority, rather than the exact form of customs arrangements between the mainland U.K. and Northern Ireland and how exactly consent is given for that by the DUP.

    Johnson’s deal doesn’t look like it crosses any of the Spartans’ red lines. They haven’t said so far whether they’ll back him, but some of the noises ahead of the deal’s announcement were positive. They realize if a deal doesn’t pass now, there’s a chance Brexit may never happen. Secure their support, and it’s possible Johnson could win enough votes to pass his deal, as Bloomberg’s Rob Hutton outlined on Wednesday.

    Much depends too on whether Brexit-supporting Labour MPs back a deal.

    It may seem hard to imagine what the DUP gains from its opposition, other than burnishing its own Braveheart reputation by holding out. But the DUP plays a long game. They’re asking themselves whether the new arrangements, which include customs and regulatory checks on the Irish Sea border, will over time make it easier for Northern Ireland to drift toward unification with Ireland. They’re thinking about how unionist voters will regard their support for a deal that doesn’t give them an effective veto over the new arrangements, as Johnson’s original proposal did. 

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    Midcap British Stocks Soar On Move Toward Brexit Talks

    This article by Steve Goldstein for MarketWatch may be of interest to subscribers. Here it is in full:

    The midcap FTSE 250 rose 3.5%, its best single-day percentage gain in more than three years, as European leaders indicated there was progress toward reaching an agreed deal with the U.K. on leaving the European Union. The European Union says it has agreed with the United Kingdom to "intensify" Brexit negotiations in a belated attempt to reach a divorce deal ahead of Oct. 31. A number of FTSE 250 components sported double-digit gains, including bank CYBG, building materials distributor Grafton Group and home improvement retailer Travis Perkins. The FTSE 100 however saw much smaller gains, of just 0.7%, because many of those components record revenue in dollars.

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    U.S., China Said to Reach Partial Deal, Could Set Up Trade Truce

    This article by Jenny Leonard for Bloomberg may be of interest to subscribers. Here is a section:   

    The U.S. and China reached a partial agreement Friday that would broker a truce in the trade war and lay the groundwork for a broader deal that Presidents Donald Trump and Xi Jinping could sign later this year, according to people familiar with the matter.

    As part of the deal, China would agree to some agricultural concessions and the U.S. would provide some tariff relief. The pact is tentative and subject to change as Trump prepares to sit down with China’s Vice Premier Liu He later Friday.

    Stocks jumped Friday after the news. Equities had advanced globally earlier in the day amid growing conviction that the U.S. and China would negotiate a trade truce. Trump tweeted earlier Friday that “good things” were happening in the meetings -- and that if the countries did reach an agreement, he would be able to sign it without a lengthy congressional approval process.

    On Thursday and earlier Friday, Liu and U.S. Trade Representative Robert Lighthizer held the first senior-level discussions between Washington and Beijing since a previous agreement fell apart in May and tariffs were raised in the months after. The world’s two biggest economies have been trying for the past year and a half to settle their trade dispute.

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