Negative Rates and Trade War
- Latin America coronavirus cases spike. Brazil daily death toll hits 1,000 for the first time with already around 300,000 cases, only after U.S and Russia. The lack of response from policymakers and a weak health system rise concerns over virus consequences in this country. U.S and Europe de-escalation plans continue as daily cases and deaths decrease.
- Germany and France agreed on a €500 bn Coronavirus rescue package within the framework of the EU budget, supported by additional borrowing. They suggest hardest hit countries are given direct handouts, something Austria immediately opposed to. Although countries would share liability for this recovery, the exposure is limited, avoiding Germany’s constitutional ban on debt mutualization. Italian bonds risk premium over German Bunds narrowed to 216 basis points, the lowest level in May.
- Oil prices rises above $34 after a record draw in Cushing and higher-than-expected fall in crude oil stocks. Cushing oil inventories fell by 5 million barrels while crude oil stock fell by 4.8mm (+2.4mm exp). Natural reduction in oil supply after collapse in U.S oil rigs due to profitability; the artificial 10mm cut within the OPEC+ and G20 oil producers and the spike in demand as de-escalation plans go forward are driving oil prices higher. Today’s drop in the price was caused by uncertainty in the economic situation of China after Beijing avoided setting a hard target in GDP growth for the period ahead for the first time. China is the biggest oil importer in the world.
- China considers more trade barriers with the most China-dependant developed economy, Australia as this country continues to investigate the origins of the pandemic. Chinese officials have drawn up a list of goods ranging from wine and dairy to fruit that could be subject to quality checks, tariffs, customs delays or consumer boycotts promoted by state media. However, this does not include iron and related goods that make 70% of the Australian exports to the Asian giant.
- Andrew Bailey, the Bank of England governor confirmed negative rates are “under active review” for the first time in its 324-year history, after having said the BoE was not “planning or contemplating” negative rates one week ago. The interest rate in a three-year gilt auction on Wednesday (government bonds in the UK and Commonwealth), fell below zero for the first time.
- Weekly Jobless Claims eased to 2.438 million in the week ended May 16th, the lowest level since the coronavirus outbreak. The number of Americans filing for unemployment benefits rose to 38.6 million since March 21st. Expectations were at 2.4 million. Compared to pre-crisis levels, jobless claims are still 10 times higher.
U.S-China Trade War Escalation
On Wednesday, Trump tweeted that a “wacko” in China released a statement accusing everybody other than China for the virus and reminded this “dope” that the pandemic was an incompetence of China. A journalist from the state-controlled Chinese tabloid Global Times, where the government releases in an informal way what they think, replied that this “dope” is a fictional one invented by one of the liars in his team. A remarkable new way of diplomacy from both sides.
Although this “war of words” will not probably have an impact on U.S – China relationship, the Senate has passed a bill that could.
The U.S senate passed a bill to de-list Chinese companies from U.S exchanges if they do not comply with accounting regulations. None of the companies registered in China or Hong Kong can be audited by the Public Company Accounting Oversight Board as China prohibits this organisation to do so. “There are plenty of markets all over the world open to cheaters, but America can’t afford to be one of them” said John Kennedy, one of the bill’s sponsors.
This bill could affect U.S listed shares of Chinese ecommerce giant Alibaba, Internet streaming company iQiyi or the retailer JD.com. Their shares all fell following this event.
In addition, Mike Pompeo, the U.S Secretary of State, drew China’s ire after publicly congratulating the elected president of Taiwan, a territory claimed by mainland China.
The deterioration in the U.S-China relationship involves more areas in conflict in addition to trade.
One of them is Hong Kong and Taiwan sovereignty and autonomy. The long-standing disagreement has heated up in recent days. Yesterday, the National People’s Congress in Beijing agreed legislation that would help complete Hong Kong’s obligation to enforce laws on treason, secession, sedition, counter terrorism, foreign interference, including a bill that would criminalize disrespecting China’s national anthem. Hong Kong pro-democracy and human rights activists urged protests against this law known as “China Security Law”. Trump pledged he would respond “very strongly”.
As usual, I leave here the S&P 500 1-week performance heat map and the link to the FT interactive Coronavirus cases chart.
Have a good weekend.