The political problems of the world continue in an endless loop.
China has denied that it had offered a package to slash the U.S. trade deficit by up to $200 billion. The denial came just hours after U.S. officials had said that China was proposing trade concessions and increased purchases of American goods aimed at cutting the U.S. trade deficit.
Chinese Vice Premier Liu He is in Washington this week for talks with U.S. officials, led by U.S. Treasury Secretary Steven Mnuchin, aimed at heading off a trade war between the two nations.
Meanwhile, President Trump has said that White House National Security Adviser John Bolton was wrong to use Libya as a model for North Korean disarmament.
In fact, President Trump rebutted his national security adviser, telling reporters that he didn’t consider the nuclear disarmament of Libya a model for negotiations with North Korea over its atomic weapons program, saying: “The Libya model isn’t a model we have at all” for North Korea.
Trump also suggested China could be encouraging North Korea’s turn toward a harder line on nuclear negotiations and he repeated a threat against Kim Jong Un’s regime if the scheduled talks with North Korea collapse.
Meanwhile in Italy, the two “anti-parties” that are still trying to form a coalition “against” everything, have a new coalition plan that does not mention a 250 billion euro ($295 billion) write-off, and drops the request to exclude QE bonds from Italy's debt/GDP calculations.
The common threat to all this political noise is the relative indifference of financial markets.
There has been a little movement in the Italian bond yield, but it’s hardly dramatic. Aside from foreign central bank holdings, Italian bonds are largely held by domestic investors who are inclined to shrug their shoulders and go back to their espressos in response to all this political noise.
And then we still have the indescribable tedious EU – UK divorce process that continuous to be tedious. The latest situations are an attempt to find a backup solution by “staying in” the EU customs union “without staying in” the customs union.
Unless there is a serious threat to a soft exit of the UK from the EU, no one really cares that much about the details and tail events for geopolitical risks like North Korea don't move markets because markets don't price in extreme tail risks like that.
The one area where politics does matter is in international trade because this is where politicians can directly interfere in the pure world of economics.
The European Union (EU) March export data for trade in goods to the United States increased 2.2 percent year-over-year, which isn't the way the Trump administration would like it to see it go.
Finally, the European Commission has unveiled a law that bans European companies from complying with U.S. sanctions against Iran and doesn't recognize any court rulings that enforce American penalties. The Commission has also decided to allow the European Investment Bank to facilitate European companies’ investments in Iran while the commission itself will maintain its cooperation with Iran.
For investors, it’s worth noting that trade tensions have a bigger market impact than they have an economic impact.
Turning to Emerging Markets, Fitch Ratings reported that outstanding debt securities from the Emerging Markets’ (EM) nations has risen to $19 trillion from $5 trillion a decade ago. The report is titled: “From QE to QT: Emerging Market Cross-Sector Risks.”
Now, for investors it will be extremely important not to overlook the fact that despite the positive development of local-currency EM bond markets, borrowers will be hobbled by higher external borrowing costs, a stronger dollar and a sizable slowdown of capital inflows.
Fitch also estimates in its report the Fed will have raised rates at least six (6) times (!) by the end of 2019, which should stimulate the dollar.
We’ll see what the markets, the dollar, etc. will do with all that.
Anyway, watch out for serious bumps in the road!
Yes, a rising dollar will test the Emerging Markets’ (EM) vulnerabilities.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
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