PETER’S BUSINESS & FINANCE BRIEFING – Thursday 18 April 2024, 06:00 Hong Kong
• IMF warns US & China debt pose ‘significant risks’ to global economy • Biden calls for tripling of tariffs on Chinese steel • Japan exports rise in March on growing China and US demand
Thursday’s Opening Call
Hang Seng (Hong Kong) Projected Open: 16,270 +18 points +0.1%
Nikkei 225 (Japan) Projected Open: 37,740 -222 points -0.6%
Quick Summary - 4 Things To Know Before Asian Markets Open
China and the US will drive much of the increase in global public debt over the next five years, with American spending creating trouble for many other countries by keeping interest rates high, officials at the International Monetary Fund said on Wednesday. “In both economies, public debt is projected under current policies to nearly double by 2053,” the IMF said in its Fiscal Monitor, an overview of global public finance developments. “Rampant spending by the US and China in particular could “have profound effects for the global economy and pose significant risks for baseline fiscal projections in other economies”, the IMF said.
US President Joe Biden has called for a tripling of tariffs on some steel and aluminium from China. Speaking to members of the United Steelworkers union in Pennsylvania on Wednesday, the president said the Chinese prices were "unfairly low" due to the government subsidising companies "who don't need to worry about making a profit". "They're cheating," Mr Biden said. "And we've seen the damage here in America." He said tens of thousands of steelworker jobs had been lost in the early 2000s because of Chinese imports. "We're not going to let that happen again," he said.
Exports from Japan rose by 7.3% y/y to a three-month peak of ¥9.470 trillion in March, following 7.8% growth in February, driven by increased demand from China and the US. It was the fourth straight month of increase in shipments, as sales of transport equipment climbed 10.3%, led by motor vehicles (7.1%) and cars (8.0%). Shipments of semiconductors rose 11.3%. Exports to the US grew 8.5%, and to China by 12.6%.
Singapore's non-oil domestic exports (NODX) slumped 20.7% y/y in March, after a marginally revised 0.2% fall in the prior month. Economists polled by Reuters forecasted a 7% fall. It was the second straight month of decline in NODX and the steepest fall since January 2023, due to drops in both the electronic and non-electronic sectors. Sales fell to the US by -50.2%, while rising to Hong Kong (16.5%), China (11.9%).
Israel Weighs Retaliatory Measures Against Iran
Israel is weighing up retaliatory measures against Iran for its attack on the country last Saturday. The Israeli military's chief of staff, Lt Gen Herzi Halevi, said that the Iranian attack would not go unanswered. Iran's first-ever direct attack on Israel on Saturday saw a wave of more than 300 missiles and drones fired from Iran, Iraq, Syria and Yemen, with most being downed by Israel and its allies. Tehran said the attack was retaliation for a presumed Israeli air strike on its consulate in Syria on 1 April, in which 13 people were killed. Some of the potential options range from a strike at Iran’s nuclear facilities, one of the riskiest and most aggressive possibilities, to cyberattacks on military infrastructure or actions against Iranian proxies.
So far, Israel appears to have countered with only a diplomatic offensive. Its foreign minister urged more than 30 countries to impose sanctions on Iran's missile programme. It has also called for the Islamic Revolutionary Guard Corps (IRGC), a major military, political and economic force in Iran, to be designated a terrorist organisation, something the US has already done but other countries have not. US Treasury Secretary Janet Yellen said that “all options” to disrupt Iran’s terrorist financing will be on the table, and that the US wouldn’t hesitate to work with allies to continue disrupting Iran’s “destabilising activity.” Her comments come as finance ministers and central bank governors from across the world gather in Washington for the International Monetary Fund and World Bank spring meetings. Geopolitical developments are set to once again dominate the discussions, with conflicts in Ukraine and the Middle East continuing to pose a threat to the global economy.
US House Moves Closer To Vote Over Aid For Ukraine & Israel
The US House of Representatives is expected to vote on sending additional aid to Ukraine and Israel on Saturday evening, in a move that could provide US$95bn in critical support to the countries and end months of congressional inaction. House Speaker Mike Johnson said an Iranian attack on Israel over the weekend had increased the urgency to sign off new foreign aid. He told fellow Republican party members on Wednesday that he would publish draft legislation on three bills with additional military funding for Israel, Taiwan and Ukraine. Mr Johnson said the separate aid bills could be put to a vote this week. House members will have 72 hours to study the legislation, setting the stage for a final vote on all three measures on Saturday evening that will be watched closely by US allies in Europe.
President Joe Biden said in a statement on Wednesday he “strongly” supported the package and urged the House and Senate to get behind it. “I will sign this into law immediately to send a message to the world: we stand with our friends, and we won’t let Iran or Russia succeed.” The move comes at a critical time for Ukraine in its war against Russia and follows months of lobbying by US allies who have warned that the country’s defences could be overrun by far superior Russian firepower without fresh military aid from Washington. Russia has made steady territorial gains after its full-scale invasion entered a third year. President Volodymyr Zelensky has called for his allies to show the same unity they have shown Israel, highlighting "the intensity of Russian attacks". But right-wing Republicans, whose party narrowly control the House, have increasingly questioned American support for Kyiv due to its expense. Among them are Donald Trump, the party's 2024 presidential candidate.
Mr. Johnson had previously attempted to make Republican support for foreign aid conditional on President Joe Biden tightening US border security, a move that ultimately failed. The Speaker has also been resisting a threat to oust him by Marjorie Taylor-Greene, who opposes what she sees as compromises made with rival Democrats. Following months of political deadlock over the aid, Mr Johnson pledged American support following events in the Middle East over the weekend. Mr. Johnson is expected to need Democrats’ support to get the funding passed, and to stay on as Speaker.
Biden Calls For Tripling Tariffs On Chinese Metals
US President Joe Biden has called for a tripling of tariffs on some steel and aluminium from China. Speaking to members of the United Steelworkers union in Pennsylvania on Wednesday, the president said the Chinese prices were "unfairly low" due to the government subsidising companies "who don't need to worry about making a profit". "They're cheating," Mr Biden said. "And we've seen the damage here in America." He said tens of thousands of steelworker jobs had been lost in the early 2000s because of Chinese imports. "We're not going to let that happen again," he said. Mr. Biden said of China, “they’ve got a population that has more people in retirement than working. They’re not importing anything. They’re xenophobic — nobody else coming in. They’ve got real problems.”
It is the latest protectionist policy to be embraced by Mr Biden as he campaigns for re-election against Donald Trump, who introduced sweeping tariffs against China when he was president. Mr Trump, who called himself "tariff man", has pledged to be even more aggressive on trade should he be re-elected. He has proposed a 10% border tax on all imports, which would jump to more than 60% for products from China.
The International Monetary Fund warned on Tuesday that this kind of geopolitical tension risked damaging global economic growth and pushing inflation higher. The White House has denied that the tariffs, which would lift a key border tax rate from an average of 7.5% to 25% on a tiny fraction of imports, would raise prices in the US. It said the proposal was aimed at protecting US jobs against "unfair" competition.
IMF: US & China Debt Pose ‘Significant Risks’ To Global Economy
China and the US will drive much of the increase in global public debt over the next five years, with American spending creating trouble for many other countries by keeping interest rates high, officials at the International Monetary Fund said on Wednesday. “In both economies, public debt is projected under current policies to nearly double by 2053,” the IMF said in its Fiscal Monitor, an overview of global public finance developments. “How these two economies manage their fiscal policies could therefore have profound effects on the global economy and pose significant risks for baseline fiscal projections in other economies.”
The fund said in its benchmark Fiscal Monitor that it expected the US to record a fiscal deficit of 7.1% next year, more than three times the 2% average for other advanced economies. The IMF has warned the US that its massive fiscal deficits have stoked inflation and pose “significant risks” for the global economy. “High and uncertain interest rates in the US affect the cost of funding elsewhere in the world,” Vitor Gaspar, director of fiscal affairs at the IMF, said in an interview. “The impact is quite significant.”
It also raised concerns over Chinese government debt, with the country set to record a deficit of 7.6% in 2025, more than double the 3.7% average for other emerging markets, as Beijing copes with weak demand and a housing crisis. The fund warned that a larger-than-expected slowdown in China, “potentially exacerbated by unintended fiscal tightening given significant fiscal imbalances in local governments”, can create risks for the rest of the world through lower levels of international trade, external financing and investments.
Rampant spending by the US and China in particular could “have profound effects for the global economy and pose significant risks for baseline fiscal projections in other economies”, the IMF said. The US and China were among four countries the fund named that “critically need to take policy action to address fundamental imbalances between spending and revenues”. The others were the UK and Italy. The four countries were driving global debt levels close to 100% of GDP and they “critically need to take policy action to address fundamental imbalances between spending and revenues,” the IMF said.
New Zealand’s Inflation Rate Falls To Lowest Level In 3 Years
New Zealand’s inflation rate in the first quarter fell to its lowest level in nearly three years, official data showed on Wednesday. The consumer price index (CPI) eased to 4% in the March quarter of 2024, from 4.7% in the fourth quarter. It was the lowest figure since June 2021. The principal drivers of inflation were rents, housing and energy, which were offset by cheaper transport. Prices rose 0.6% quarter-on-quarter. The numbers exceeded the Reserve Bank of New Zealand’s forecast of an annual CPI rate of 3.8% and a 0.4% quarterly rise. Inflation remains above the central bank’s target range of 1-3%.
Japan Manufacturers’ Mood Eases In April
Business optimism in Japan darkened among large firms as the weak yen weighed on households, according to the Reuters Tankan survey for April. The Reuters Tankan sentiment index for manufacturers in Japan fell slightly to +9 in April from +10 in March, easing from a three-month high due to ongoing cost-of-living pressures and uncertain economic conditions in the country’s major trading partner, China. A positive number means optimists outnumber pessimists, and vice versa. The report said that sharp falls in the yen have pushed up the cost of imports in a blow to household consumption. It also added that while the currency’s weakness boosted the value of exports, volume of shipments have not benefited as much. The services sector index fell to +25 from +32 in the previous month, despite some gains by retailers, Reuters said. The Reuters Tankan index, released monthly, is widely considered as a leading indicator of the Bank of Japan’s quarterly Tankan survey.
Japan Exports Hit 3-Month High
Exports from Japan rose by 7.3% y/y to a three-month peak of ¥9.470 trillion in March, following 7.8% growth in February, driven by increased demand from China and the US. It was the fourth straight month of increase in shipments, as sales of transport equipment climbed 10.3%, led by motor vehicles (7.1%) and cars (8.0%). Shipments of semiconductors rose 11.3%. Exports grew to the US (8.5%), China (12.6%), Malaysia (10.9%), Vietnam (23.6%), India (15.3%), Germany (2.4%), and the EU (3.0%), while falling to Singapore (-5.1%), Thailand (-7.2%), Indonesia (-22.4%), and Russia (-35.5%). The yen is trading at 34-year lows, helping boost the competitiveness of exports, a boon as the economy has contracted for two consecutive quarters.
Imports to Japan shrank by 4.9% y/y to ¥9.103 trillion in March, reversing a 0.5% rise in February. Japan's trade balance shifted to a surplus of ¥366.467 trillion in March from a deficit of ¥750.854 trillion in the same period of the prior year. It was the first trade surplus in three months.
Singapore NODX Falls The Most In 7 Months
Singapore's non-oil domestic exports (NODX) slumped 20.7% y/y in March, after a marginally revised 0.2% fall in the prior month. Economists polled by Reuters forecasted a 7% fall. It was the second straight month of decline in NODX and the steepest fall since January 2023, due to drops in both the electronic and non-electronic sectors. Shipments of non-electronic goods shrank at a faster pace (-23.2% vs -1.7% in February), while sales of electronic products dropped 9.4%, after 5.2% growth in the prior month due to falls in telecommunication equipment (-38.8%). Sales fell to the US (-50.2%), the EU (-45.4%), Japan (-36.5%), Thailand (-12.8%), South Korea (-12.6%), and Malaysia (-11.2%), while rising to Hong Kong (16.5%), China (11.9%), and Taiwan (2.0%). On a seasonally adjusted basis, NODX shrank 8.4% in March, the steepest fall in 10 months, following an upwardly revised 4.9% drop in February. Singapore’s total trade decreased 1.8% year-on-year in March, after the 3.5% increase in the preceding month. Exports declined 3.4%, while imports also fell 0.1%.
Indonesia Retail Sales Rise The Most In 8 Months
Retail sales in Indonesia increased by 6.4% year-on-year in February, picking up sharply from 1.1% growth in the previous month. It marked the ninth straight month of expansion in retail trade and the fastest pace since last June, boosted by a strong upturn in food sales ahead of the Ramadan fasting month (9.1% vs 3.1% in January). On a monthly basis, retail sales grew 1.7% in February, rebounding from a 3.5% drop in January which was the steepest fall in six months.
UK Inflation Falls Less Than Expected In March
UK inflation slowed less than expected in March, stoking the debate further over how soon the Bank of England will start cutting interest rates. The latest CPI report revealed that the UK's inflation rate fell to 3.2% in March, the lowest since September 2021 but exceeding economists’ expectation of 3.1%. It was primarily driven by a slowdown in food inflation (4.0% vs 5.0% in February). Additionally, the core rate also decelerated to an over two-year low of 4.2%, the lowest rate since December 2021, although it remained slightly above forecasts of 4.1%. The core CPI was 4.5% in February. Services inflation, which is closely monitored as an indicator of domestic price pressure, eased slightly from 6.1% to 6%. On a monthly basis, consumer prices rose by 0.6% in March, the same pace as in February.
Fitch Cuts Tencent & Alibaba Ratings From ‘Stable’ to ‘Negative’
Fitch Ratings has revised the outlook on the Long-Term Foreign-Currency Issuer Default Ratings of Alibaba and Tencent to ‘Negative’ from ‘Stable’, following the revision in the outlook on the Chinese sovereign to Negative from Stable on 9 April 2024. Fitch wrote that this “reflects our view that the underlying credit quality of these companies should not exceed that of the sovereign due to their predominantly domestic businesses and the level of government regulation, oversight and intervention in their sector.” The long-term default ratings on the two companies’ senior debt were affirmed at “A+.”
Morgan Stanley Planning Biggest China Job Cuts In Years
Morgan Stanley plans to start cutting about 50 investment-banking jobs in the Asia-Pacific region this week, with at least 80% of the reductions in Hong Kong and China, according to Bloomberg News sources. The planned cuts affect about 13% of the 400 bankers in the region, excluding Japan, the Bloomberg report said. More than 40 people in Hong Kong and mainland China are expected to lose their jobs in the coming round. The job cuts would be the deepest in years for Morgan Stanley in China, its biggest market in the region. Morgan Stanley reported Tuesday that net revenue from Asia fell 12% to US$1.74 billion in the first quarter from a year earlier, even as its global results topped forecasts.
Global financial firms are seeking to reduce expenses amid a deal drought, and have been cutting investment-banking staff in Asia amid deteriorating US-China relations, along with a crackdown on private enterprise and a property crisis. Stock sales by Chinese firms in the US and Hong Kong plummeted to a two-decade low of US$1.7 billion in the first quarter, about 30% of the volume in the same period last year, and just 4.3% of the level seen in the 2021 peak, data compiled by Bloomberg shows.
HSBC on Tuesday started a new round of reductions of about a dozen bankers, joining UBS and Bank of America, which cut jobs earlier this year. On the mainland, at Guotai Junan Securities, a state-owned brokerage based in Shanghai, several senior analysts recently resigned after deciding not to accept pay cuts and stricter performance metrics. One Shenzhen-based brokerage laid off 40% of its analysts during the first quarter and slashed their 2023 bonuses by more than 50%. Other brokerages are reducing meal and travel budgets to contain costs.
Asian Markets
Asia-Pacific stock markets were muted on Wednesday as traders awaited the response from Israel to the attack by Iran last weekend and digested hawkish comments from Fed Chairman Jerome Powell. He said Tuesday, the US economy has not seen inflation come back to the central bank’s goal, suggesting interest rate cuts were unlikely in the near future. He said, “the recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence.” Mr. Powell added, “more recent data shows solid growth and continued strength in the labour market, but also a lack of further progress so far this year on returning to our 2% inflation goal.”
The MSCI Asia Pacific Index fell 1.0% and was close to erasing all of its gains for the year. Japan’s Nikkei 225 slipped 1.3%, reversing earlier gains. The Reuters Tankan index showed that business optimism dipped in Japan for April. South Korea’s Kospi extended losses, falling 1.0% after tumbling 1.9% on Tuesday. In Australia, the S&P/ASX 200 fell 0.1%. Markets in India were closed for a public holiday.
China Stocks Recover Some Ground
Mainland Chinese stocks were the best performers in Asia on Wednesday following a stronger than expected GDP reading for the first quarter. The Shanghai Composite Index jumped 2.1% to 3,071 whilst the CSI 300 index climbed 1.6%.
The CSI 2000 index of small cap stocks bounced 6.7% on Wednesday after plunging 7.2% on Tuesday and 11% over the first two days of the week on fears of delisting risks in light of a new regulatory framework. China’s State Council on Friday pledged to tighten stock listing criteria, crack down on illegal share sales and strengthen the supervision of dividend payouts. Guo Ruiming, a China Securities Regulatory Commission director, said they don’t expect a surge in delistings as a result of the changes. The amended rules target so-called “zombie” companies or “bad actors” in the market, said Ruiming, not small caps.
In Hong Kong, the Hang Seng was flat near a five-week low of 16,252. The Tech Index was up 0.1%.
European Stocks Recover Ground Despite Powell Comments
European stocks were slightly higher Wednesday despite comments the day before from the head of the US Federal Reserve, Jerome Powell, that the US economy has not seen inflation come back to the central bank’s goal, suggesting interest rate cuts were unlikely in the near future. The regional Stoxx 600 index was up 0.1%, with most sectors trading in the green. Household goods jumped 1.8%, while tech fell 2.6%. London’s FTSE 100 rose 0.4% as data showed UK inflation eased to 3.2% in March, slightly less than economists expected.
Dutch chip manufacturing equipment supplier ASML said Wednesday that the semiconductor industry is recovering even though its sales dropped more than a fifth. ASML reported a 21% drop in sales and lower-than-expected orders. First-quarter net sales at the Netherlands-based electronics group fell to €5.3bn, down from €6.7bn in the same period a year earlier and €7.2bn in the fourth quarter but in line with its guidance. Net income was down 37% y/y to €1.2bn. ASML is one of the most important semiconductor firms in the world, producing tools known as extreme ultraviolet lithography machines, which are required to manufacture the most advanced chips globally. Shares of ASML tumbled 6.7% in Amsterdam.
Shares in luxury companies rose on Wednesday after industry leader LVMH reported first-quarter results. LVMH reported its weakest quarterly sales growth since the pandemic recovery supercharged luxury revenues at the start of 2021, as Chinese demand subsided, and champagne sales fell. The world’s largest luxury group said that like-for-like sales in Asia excluding Japan, which is dominated by the Chinese market, declined by 6% in the first three months of the year. However, the company reassured nervous investors about the industry’s prospects that it could eke out growth in a much tougher environment. LVMH shares rose 2.8% in Paris, pulling up shares in rivals Hermes and Richemont. Rival Kering, which recently issued a rare profit warning on weak China sales at its biggest brand Gucci, rose 0.2%.
Elsewhere in Europe, shares in the German sportswear brand Adidas advanced 8.6% after it reported a better than expected first quarter and lifted its full-year guidance for operating profit to €700mn from €500mn. Shares in the German tyremaker Continental slipped 5.5% after it reported that first-quarter sales and pre-tax profits came in below expectations.
S&P 500 & Nasdaq Close Lower For A Fourth Straight Day
US stocks on Wednesday notched a four-day losing streak for the first time since the start of the year. A report that an Israeli strike against Iran’s nuclear facilities was being considered, sent stocks sharply lower in the morning session, before recovering some of the lost ground in the afternoon. The S&P 500 fell 0.6% to 5,022. Four of 11 S&P sectors made gains, with utilities faring best, rising 2.1%. Tech stocks were the worst performers falling 1.7%, weighed down by the poor ASML earnings report. The tech-heavy Nasdaq Composite fell 1.2% to 15,683, with Alphabet the only gainer in the Magnificent Seven. AI darling Nvidia fell 3.9%. The Dow fell by 46 points, or 0.1%, to 37,753, despite rising nearly 238 points at its high of the day. United Airlines surged 17.5% in its best day since November 2020 after posting a narrower-than-expected loss and beating on revenue, despite ongoing delivery slowdowns from Boeing.
US investors are paying the biggest premiums since October to protect their portfolios against a surge in volatility. The Vix index, Wall Street’s so-called fear gauge and a measure of S&P 500 volatility, hit 19.6 this week, its highest level since 20 October 2023. On Wednesday, it receded slightly to 18.2, but still far above its late-March level of 12.6. Market turmoil has also affected US bonds, with the ICE BofA Move index, which tracks volatility in US Treasuries, hitting 121, its highest level since early January and up from 86 in March.
Treasuries End 3-Day Sell Off
Traders bought Treasuries, ending a three-day sell-off. The rise was notably being led by long dated bonds with the short end underperforming. There was no particular catalyst for the move. The yield on the 10-year bond fell 8 bps to 4.59%, while the yield on the two-year note fell 2 bps to 4.94%.
US Dollar Snaps 6-Day Winning Streak
The US dollar slipped, tracking Treasury yields lower, falling 0.4% against a basket of peers after six straight sessions of increases. The overall decline supported the yen, which rose 0.2% to ¥154.33, but still close to a 34-year low. The Euro was also bid thanks to the softer dollar, rising 0.5% to $1.0672. The yuan was unchanged in onshore and offshore markets at Rmb 7.2384 and Rmb 7.2443 respectively, but US/China trade war fears are rising with President Biden calling for higher tariffs on Chinese steel.
Sterling strengthened as traders pushed back their bets on interest rate cuts from the Bank of England after UK inflation slowed less than expected in March. The pound was 0.2% higher against the dollar at $1.2448. Traders in swaps markets are now betting that the BoE will begin lowering borrowing costs in either September or November, having fully priced in a first interest rate cut in September before Wednesday’s data release.
Oil Prices Fall Sharply After US Inventory Rises More Than Expected
Oil prices fell sharply on Wednesday despite fears of a widening conflict in the Middle East as the latest data showed US inventories rising more than expected. Brent crude, the international benchmark, dropped 3% to $87.29 per barrel. The latest moves came after the Energy Information Administration said US commercial crude inventories had risen by 2.7mn barrels to 460mn barrels in the week to April 12, nearly double the increase analysts had forecast in a poll by Reuters.
Gold Sharply Lower
Gold also started to tumble around the same time as oil plunged. Spot gold fell 1.2% to $2,361 an ounce.
Bitcoin Briefly Dips Under $60,000 Ahead Of The Halving
Bitcoin briefly fell below $60,000 on Wednesday for the first time since March 5, just before it reached new all-time highs, as investors awaited the fourth “halving,” which is set to take place this Friday. The cryptocurrency was last lower by 3%, trading at $60,930.
Peter Lewis’ Money Talk Podcast
On Thursday’s “Peter Lewis’ Money Talk” podcast, I’ll be joined by Andrew Freris, the CEO of Ecognosis Advisory, and Andrew Sullivan, founder of Asian Market Sense. With a view from Taiwan is Ross Feingold, Director of Research, Caerus Consulting, Taiwan.
The podcast is also available on Apple Podcasts, Google Podcasts and Spotify.
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