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Nothing of Substance Is Likely to Be Decided at G-7

Nothing of Substance Is Likely to Be Decided at G-7
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Friday, 08 June 2018 12:32 PM Current | Bio | Archive

Today, seven heads of government will meet in Quebec, Canada for what they call their G-7 meeting that one could easily call for a tax-payer funded weekend mini-break where most of the time, not always, this has been an event where it had more to do with “spin” than with substance.

For the glory days when substance was handled we have to go back to the 1980s when in September 1985 the G-5 of then agreed on the Plaza Accord that was aimed to depreciate the dollar in relation to the Japanese yen and the German Deutsche Mark by intervening in the currency markets, and in February 1987, the G-6 of then agreed on the Louvre accord that was aimed to stabilize the international currency markets and halt the continued decline of the dollar that was caused by the Plaza Accord.

Yes, those were times when there were foreign exchange controls, when most central banks were not independent and when global trade was just a fraction of what it is today.

Since then, these gatherings have become photo opportunities. Anyway, President Trump won’t probably be there for the final photo as he will leave the gathering at 10:30 a.m. on Saturday for the Trump-Kim summit in Singapore and put Everett Eissenstat, his deputy assistant for international economic affairs, in charge for the remaining sessions.

An interesting question is if President Trump will be there to sign the traditional G-7 concluding joint statement.

So, the G-7 gathering in Quebec, Canada today and tomorrow will be different from what we have seen before, not because anything of substance is going to be decided, nothing of substance is likely to be decided.

But, and this is important for long-term investors, this meeting could become a very obvious signal of “trends” towards US isolationism. The trade situation today is not like in the 1930s. Aside from the very different structure of trade in the 1930s, the period back then was all about countries imposing tariffs against everyone else.

Today, at least so far, the process has been about the US cutting itself off from global trade and everyone else carrying on exactly as before.

That basically is what the G-7 meeting today is likely to demonstrate.

Though, to be honest, financial markets will get the same idea with a 30 seconds glance on the Trump Twitter feed.

Trade Balances

On the subject of trade, China's overall trade surplus came in somewhat lower year-to-date than last year, but its bilateral surplus with the United States was up by 13.1 percent from the same period last year.

This is hardly surprising. US policies are effectively designed to increase China’s trade surplus with the United States. Estimates are that over a third of the US tax cuts will be spent on imports and as a lot of those imports are “routed” though China, even if they are not really made in China, that means that the old-fashioned method of measuring trade will show a rise in China’s trade surplus with the United States.

German exports increased by 9.3 percent and imports by 8.2 percent in April 2018 year-on-year. After calendar and seasonal adjustment, exports fell by 0.3 percent while imports rose by 2.2 percent compared with March.

There has also been political focus the Germany’s trade position.

Emerging Markets

Emerging markets face for now their biggest test since the 2013 taper tantrum as rising inflation pressures, continued downward pressures on their currencies and politics have obliged several central banks to intervene directly in the FX markets.

  • Turkey raised its one-week repo rate by 125 basis points to 17.75 percent after its May inflation rose to 12.15 percent. The Turkish lira has lost 15 percent so far this year.
  • The Brazilian central bank sold yesterday and for the second time this week an additional 40,000 foreign-exchange swap contracts to reduce pressure on its currency. It usually offers 15,000 contracts daily. The Brazilian real has lost 15 percent this quarter alone.
  • Argentina has secured a $50 billion stand-by arrangement from the IMF to help restore investor confidence as the government takes aim at double-digit inflation and a widening budget deficit. The argentine peso has lost about 25 percent so far this year.
  • The central bank of India has raised for the first time since 2014 its benchmark rate by 0.25 percent to 6.25 percent.
  • The Bank of Indonesia rose 2 times interest rates by 0.25 percent to 4.75 percent in May.

It will take some time before investors will have a better insight where all this could go.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
 

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HansParisis
It will take some time before investors will have a better insight where all this could go.
trade, trump, investors, g7
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2018-32-08
Friday, 08 June 2018 12:32 PM
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