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European stocks steady as US celebrates 4th of July

European stock markets flatlined Thursday, after an uneventful session earlier in Asia, with trading volumes thin on the US Independence Day holiday, dealers said.

“European stocks have edged a tad higher while US stock futures are unchanged following Asia’s mixed session, one day after new record highs for indexes stateside,” said Oanda analyst Dean Popplewell.

“Trading remains thin due to July 4th US celebrations,” he added but sounded caution before Friday’s data release of US non-farm payrolls — a key update on the health of the world’s biggest economy.

Vulnerable Dollar

“Currently, the dollar trades broadly flat due to the US public holiday but could be vulnerable and ruin traders’ weekends if tomorrow’s US NFP data comes in on the weaker side.”

Asian equity markets experienced mixed fortunes, despite a record-breaking performance on Wall Street, as investors turned their focus to Friday’s upcoming data while hoping for a big Federal Reserve interest rate cut.

US traders went on a pre-July 4 spending spree Wednesday to push all three main indexes to their all-time highs as a string of weak economic indicators reinforced the case for the Fed to reduce borrowing costs.

With the relief rally from Donald Trump and Xi Jinping’s trade war ceasefire running its course, dealers were turning their attention to the global outlook and pinning their hopes on central bank support.

The release Friday of US non-farm payroll figures is key, analysts say, with a weak reading likely to reinforce expectations of a rate cut.

Talk of a reduction and concerns about the economy have seen the yield on safe haven 10-year Treasuries fall below two percent.

French Negative Yield

Stephen Innes, at Vanguard Markets, said the fall in yields across several asset classes “has increased investor appetite for high dividend-yielding equity risk”.

In Europe meanwhile, the French Treasury issued 10-year bonds at negative interest rates for the first time ever, meaning investors are now willing to pay, rather than receive, interest on their bond purchases.

Dealers attributed part of the rally in eurozone bond markets to the nomination of IMF chief Christine Lagarde as head of the ECB where she would be expected to pursue loose money policies.

“With increasingly dovish central bank rhetoric throughout Europe and the US, further gains look likely,” predicted Joshua Mahony, senior market analyst at IG.

The increasing likelihood of a Fed cut has, however, weighed on the dollar, with riskier currencies such as the South Korean won, Australian dollar and Indonesian rupiah all strengthening.

However, Trump hit out at China on Wednesday in a Twitter rant, accusing it and Europe of artificially keeping the yuan and euro weak to gain an advantage over the US.

He said they were playing a “big currency manipulation game” and “pumping money into their system”, adding that the US should step up to the fight by matching them.

Oil prices meanwhile sagged, with traders disappointed by the size of the drop in US stockpiles of the commodity, while worries over the global economic outlook weigh on demand expectations.

SB PHOTO

China hits back at Trump with tariffs on $60 billion of US goods

China is to slap tariffs on an additional $60bn (£46bn) of imports from the United States in retaliation against $200bn of new trade sanctions on Chinese goods announced by Donald Trump.

The latest moves represent a new step towards a full-scale trade war between the world’s two biggest economies. Further escalation is deemed likely because President Trump is facing low approval ratings ahead of the United States midterm elections in November, while China will not want to be seen to back down.

President Trump announced his latest escalation of the bitter trade standoff late on Monday, promising to introduce the additional border taxes of 10% on Chinese goods from next week.

The tariffs – designed to make United States domestic products more competitive against foreign imports – apply to almost 6,000 items, including consumer goods such as luggage and electronics, housewares and food.

The United States president threatened further tariffs on an additional $276bn of goods if Beijing unveils retaliatory measures – a step that would mean tariffs on all Chinese imports to the United States and equate to 4% of world trade.

Early on Tuesday he tweeted to accuse China of “actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me”.

The United States president added: “What China does not understand is that these people are great patriots and fully understand that China has been taking advantage of the United States on trade for many years.

“They also know that I am the one that knows how to stop it. There will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted!”

However, China then unveiled $60bn of tariffs on US imports including aircraft and coffee.

Ahead of China’s latest move, Jack Ma, the founder of e-commerce giant Alibaba and one of the country’s wealthiest men, warned the conflict could drag on for 20 years and would be a “mess” for all parties.

China faces difficulty in responding on a scale equal to President Trump’s new tariffs because its annual imports from the United States total only about $130bn, while its exports to the United States total more than $500bn.

However, analysts said the Chinese government had a comprehensive toolbox of alternative measures it could deploy to disrupt United States businesses operating in China – and might even devalue its currency to offset the impact of the tariffs.

Erik Britton of research firm Fathom Consulting said he believed China was eventually likely to capitulate and would enter fresh talks to end the threat of tariffs as a result of the trade imbalance.

“Our likeliest outcome is that China yields. They’ve been in a game of chicken – only the United States is driving a 40-tonne truck and China is driving a Fiat Cinquecento.”

Britton added that President Trump was probably using the threat of tariffs to force Beijing to change its economic policies covering United States companies.

“The point is they [the United States] want something to change,” he said. “When I threaten my kids with stopping their pocket money it’s not that I want to raise money. It’s that I want them to tidy their room.”

President Trump has argued Beijing uses “unfair” trade practices such as forcing the transfer of United States firms’ intellectual property when they operate in China. Some analysts, however, said the threat of tariffs could exacerbate these actions, rather than end them.

David Chmiel, the managing director of risk consultancy Global Torchlight, said: “There could be a weaponising of regulation by Beijing. You can see a situation where they target specific United States companies.”

Economists said this could have a significant impact as many United States companies – including Nike, General Electric and Apple – have operations in China. Disruption could range from invasive health and safety checks to tougher labour controls or rules on fire standards. Mergers and acquisitions could be made more difficult, and state contracts could be withheld from United States firms.

Keith Wade, the chief economist at Schroders, said: “Very zealous enforcement of regulations could make life quite difficult for companies. America is also probably more dependent on China than the official trade figures suggest.”

United States Census Bureau figures show China sells about $375bn more to the United States than goes the other way. However, Deutsche Bank reckons taking into account direct in-country sales by United States firms in China would give a $20bn surplus in favour of the United States.

Foreign PHOTO

Foreign businesses to UK: solve Brexit or risk £100bn in trade

Business leaders from the US, Canada, Japan and India have told the British government to solve the Brexit issue urgently or put more than £100bn worth of trade at risk.

Lobby groups representing business interests from the four countries took the unusual step of issuing a joint statement on Brexit before the European council summit this week. It came days after Airbus said its investment in the UK would be at risk from a hard Brexit, prompting the health secretary, Jeremy Hunt, to say the Franco-German aircraft maker’s intervention was “completely inappropriate”.

Groups representing corporate giants including Nissan, Bombardier and Facebook expressed their concerns on Monday that Britain was heading towards a disorderly departure from the EU, potentially affecting more than £100bn in trade and putting investment in the UK at risk.

“International businesses who are heavily invested in both the EU and the UK are calling for urgent progress on the key outstanding issues remaining in the talks,” they said in the statement. “Resolving as many of the remaining concerns as possible is becoming more urgent by the day – with the clock ticking towards the October deadline for a final withdrawal agreement.”

The statement was signed by the American Chamber of Commerce to the EU, representing companies including Boeing, Exxon Mobile, Facebook, Dell, Coca-Cola and FedEx. It was also signed by the Canada Europe Roundtable for Business, Europe India Chamber of Commerce and the Japan Business Council in Europe.

The statement said they recognised the complexity of finding a solution for the Irish border, but urged both the EU and the UK to continue to try to find agreement on the issue.

In the meantime, they urged policymakers to “dedicate time and thought at the upcoming summit” to address the remaining issues, including the role of the European court of justice, the future UK-EU regulatory regime and post-Brexit preparedness.

“Reaching agreement on these issues will provide businesses with more confidence that a withdrawal agreement can be agreed and ratified, thereby providing legal certainty for the proposed transition period and avoiding the worst-case ‘cliff-edge’ scenario in March 2019 ,” the statement said.

It reflects a growing frustration in business over the lack of a clear Brexit strategy two years after the referendum.

In the wake of the Airbus comments, BMW said it needed clarity on Brexit negotiations “in the next couple of months”. Car manufacturers are expected to issue a fresh and strong warning over Brexit at a Society of Motor Manufacturing and Traders (SMMT) meeting on Tuesday.

The car industry employs more than 800,000 people in the UK and the Japanese ambassador has warned Theresa May that his country’s firms will quit Britain if a botched Brexit makes it unprofitable to stay.

Koji Tsuruoka told the prime minister earlier this year that if “there is no profitability of continuing operation in [the] UK … no private company can continue operations”.

Both he and the outgoing boss of BMW will speak at the SMMT conference.

Japan’s business interests in the UK include Nissan, Mitsubishi, Panasonic and Honda, with trade with the UK worth £46bn. Nissan, Toyota and Honda began their UK operations in Britain in the 1980s and now build nearly half of all of the 1.7m cars produced in the UK last year.

The car industry is concerned that if the UK does not stay in the single market, it will be hit by costly delays in delivering components from the EU.

America’s import and export trade with the UK is worth around £43bn but it is also a heavy investor in business with a large presence in the UK in tech, pharmaceuticals and transport.

Canada’s business interests in the UK include the Bombardier aircraft wing factory in Belfast, which was recently saved from making thousands of redundancies after winning a legal challenge in a trade dispute with US rival Boeing and the Trump administration.

The UK ranks as Canada’s second most important trading partner after the US with bilateral trade worth CN$27.1bn (£15bn). India’s exports to the UK are valued at around $9bn (£6.79bn) with machinery and clothing among the highest value products.

Trade War PHOTO

China slams US “blackmailing” as Trump issues new trade threat

US President Donald Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods and Beijing warned it would retaliate, in a rapid escalation of the trade conflict between the world’s two biggest economies.

Trump’s latest move, as Washington fights trade battles on several fronts, was unexpectedly swift and sharp.

It was retaliation, he said, for China’s decision to raise tariffs on $50 billion in US goods, which came after Trump announced similar tariffs on Chinese goods on Friday.

“After the legal process is complete, these tariffs will go into effect if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced,” Trump said in a statement on Monday.

The comments sent global stock markets skidding and weakened both the dollar and the Chinese yuan on Tuesday. Shanghai stocks plunged to two-year lows.

China’s commerce ministry said Beijing will fight back with “qualitative” and “quantitative” measures if the United States publishes an additional list of tariffs on Chinese goods.

“Such a practice of extreme pressure and blackmailing deviates from the consensus reached by both sides on multiple occasions,” the ministry said in a statement.

“The United States has initiated a trade war and violated market regulations, and is harming the interests of not just the people of China and the US, but of the world.”

US business groups said members were bracing for a backlash from the Chinese government that would affect all American firms in China, not just in sectors facing tariffs.

Jacob Parker, vice president of China operations at the US-China Business Council in Beijing, said China would undoubtedly “begin looking at other ways to enforce action against U.S companies that are operating in the market.”

Some companies have reported Beijing is meeting with Chinese businesses to discuss shifting contracts for US goods and services to suppliers from Europe or Japan, or to local Chinese firms, Parker said.

Washington and Beijing appeared increasingly headed toward open trade conflict after several rounds of talks failed to resolve US complaints over Chinese industrial policies, lack of market access in China and a $375 billion US trade deficit.

US Trade Representative Robert Lighthizer said his office was preparing the proposed tariffs and they would undergo a similar legal process as previous ones, which were subject to a public comment period, a public hearing and some revisions. He did not say when the new target list would be unveiled.

“As China hawks, like Lighthizer and (Peter) Navarro, appear to have gained power within the Trump administration lately, an all-out trade war now seems more inevitable,” said Yasunari Ueno, chief market analyst at Mizuho Securities in Japan.

Tit-For-Tat

On Friday, Trump said he was pushing ahead with a 25 percent tariff on $50 billion worth of Chinese products, prompting Beijing to respond in kind.

Some of those tariffs will be applied from July 6, while the White House is expected to announce restrictions on investments by Chinese companies in the United States by June 30.

“China apparently has no intention of changing its unfair practices related to the acquisition of American intellectual property and technology. Rather than altering those practices, it is now threatening United States companies, workers, and farmers who have done nothing wrong,” Trump said.

Trump said if China increases its tariffs again in response to the latest US move, “we will meet that action by pursuing additional tariffs on another $200 billion of goods.”

Trump said he has “an excellent relationship” with Chinese President Xi Jinping and they “will continue working together on many issues.”

But, he said, “the United States will no longer be taken advantage of on trade by China and other countries in the world.”

Cooling Chinese Economy

The intensifying trade row threatens to put more pressure on the already cooling Chinese economy, risking an end to a rare spell of synchronized global expansion and collateral damage for its export-reliant Asian neighbours.

China’s central bank unexpectedly injected 200 billion yuan ($31 billion) in medium-term funds into the banking system on Tuesday in a move analysts said reflected concerns about liquidity but also the potential economic drag from a full-blown trade war.

China imported $129.89 billion of US goods last year, while the US purchased $505.47 billion of Chinese products, according to US data.

Derek Scissors, a China scholar at the American Enterprise Institute, a Washington think tank, said that means China will soon run out of imports of US goods on which to impose retaliatory tariffs.

China was unlikely change its industrial policies in response to the US trade threats, he said. That could take a long and painful trade fight.

“As I’ve said from the beginning, China will back off its industrial plans only when US trade measures are large and lasting enough to threaten the influx of foreign exchange. Not due to announcements,” he said. – Reuters

Currency PHOTO

GBP/USD – British Pound Unchanged after Carney Testimony

The British pound is showing little movement in the Tuesday session. In North American trade, GBP/USD is trading at 1.3427, unchanged on the day. On the release front, Britain posted a deficit of GBP 6.2 billion, below the estimate of 7.2 billion. This marked the first deficit after a string of three straight surpluses. British CBI Industrial Order Expectations disappointed with a reading of -3, missing the estimate of 2 points. This was the first decline since October. In the US, the Richmond Manufacturing Index jumped to 16, well above the estimate of 9 points. On Wednesday, the UK releases a host of inflation indicators, led by CPI. The Federal Reserve will release the minutes of its May policy meeting.

Bank of England Governor Mark Carney testified earlier on Tuesday before a parliamentary committee, but his remarks have had little impact on the British pound. Carney acknowledged that growth in the first quarter was weak, blaming “temporary and idiosyncratic factors”, such as massive snowstorms which hampered economic growth. The BoE has forecast growth in Q1 of just 0.4%. As for monetary policy, Carney was subtle, saying that “interest rates are more likely to go up than not, but at a gentle rate”. The bank balked at a rate hike earlier in May, due to weakening inflation and a spate of soft economic data. BoE policymakers are unlikely to raise rates before August at the earliest.

After weeks of an escalating trade war between the US and China, there was a breakthrough of sorts on Sunday. The US dollar has posted gains after Treasury Secretary Steven Mnuchin announced that the two sides had made significant progress and the trade war was being ‘put on hold’. Just last week, the White House sounded pessimistic about a deal being reached with China. The two economic giants have imposed stiff tariffs on one another in recent weeks, worth billions in trade. These moves had raised fears of a bilateral trade war between the two largest economies in the world. The respite in tariffs means that the US can sit down with the Chinese and discuss the US trade deficit with China, which President Trump has long complained is a result of a non-level playing field with China. In addition to the trade deficit, the US wants to discuss technology transfers and cyber theft.

IRAN PHOTO

Foreign firms doing business in Iran may face sanctions, US warns

President Donald Trump’s decision to pull out of the Iran nuclear deal has left foreign firms with a choice: Stop doing business in Iran or run the risk of US sanctions.

Multinational companies have billions of dollars tied up in Iran.

In 2016, the European Union exported more than €8.2 billion ($9.7 billion) worth of goods to Iran, while importing almost €5.5 billion ($6.5 billion) from there, according to the European Commission.

But Richard Grenell, the US ambassador to Germany, warned firms that continue to do business there would face consequences.

“US sanctions will target critical sectors of Iran’s economy. German companies doing business in Iran should wind down operations immediately,” he tweeted Tuesday night.

The Federation of German Industries said any attempt to prevent firms from dealing with Iran is contrary to international law. It called on the European Union to “effectively protect European companies from the effects of illegitimate and one-sided implementation of US sanctions.”

Carl Bildt, the former leader of Sweden who is now co-chair of the European Council on Foreign Relations, highlighted that the sanctions would have the biggest impact beyond America’s borders.

“US Iran sanctions are hardly hitting any US companies, but aim primarily at European ones,” he said in a tweet.

Under the nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA), the United States committed to ease a series of sanctions on Iran and has done so under a string of “waivers” that effectively suspend them.

Virtually all multinational corporations do business or banking in the US, meaning any return to pre-pact sanctions could torpedo deals made after the 2015 agreement came into force.

“It’s a huge challenge,” said Dr. Sanam Vakil, a professor in the Middle East studies department at the Johns Hopkins School of Advanced International Studies in Bologna, Italy. “The US economy is 10 times that of Iran in terms of size and value, so it makes more sense to do business with the US than the Islamic Republic [of Iran].”

Among US companies, the plane-maker Boeing has signed the biggest deals, and Treasury Secretary Steven Mnuchin said Tuesday that its existing licenses — as well as those of its European competitor, Airbus Group — would be invalidated.

In December 2016, Airbus signed a deal with Iran’s national carrier, IranAir, to sell it 100 planes for around $19 billion at list prices. Boeing later struck its own deal with IranAir for 80 aircraft with a list price of some $17 billion, promising that deliveries would begin in 2017 and run until 2025. Boeing separately struck another 30-plane deal with Iran’s Aseman Airlines for $3 billion.

Boeing has yet to deliver any aircraft to Iran under those deals and said that it will “continue to follow the US government’s lead.”

Airbus, which is subject to the US license because it makes at least 10 percent of its aircraft components in the US, says it will abide by the new US sanctions but it could take “some time” to determine the full impact on the industry. It has already delivered two A330-200s and one A321 to Iran.

French oil company Total SA has been the most aggressive Western oil company to move back into Iran, signing a $5 billion, 20-year agreement with Iran in July. A Chinese oil company also has a deal to develop the country’s massive South Pars offshore natural gas field. Total did not respond to requests for comment.

Adam Smith, a Washington-based lawyer with Gibson Dunn and former Treasury official, agreed that if sanctions are imposed then companies will essentially be forced to choose between the US and Iranian markets.

“It’s a cost-and-benefit question for EU companies,” he said, explaining that firms would find themselves in the same situation as they were in before sanctions were lifted. “It’s a back to the future situation. It would be a world which we have been in before.”

The Treasury said there will be a “wind-down period” of 90 to 180 days to allow companies to complete transactions with Iran to avoid future US sanctions.

However, the Treasury warned that sanctions will come back into full effect after this grace period.

On Aug. 6, the US government will re-impose sanctions on activities such as the acquisition of US dollar banknotes by the Iranian government, Iran’s trade of gold and precious metals and the country’s automotive sector.

On Nov. 4, the US will re-impose sanctions on other activities including Iran’s oil and shipping industries and its energy sector, as well as on transactions by foreign financial institutions with the Central Bank of Iran.

Despite Trump’s announcement, France’s foreign minister insisted that the nuclear deal was “not dead,” adding that French President Emmanuel Macron was scheduled to speak with his Iranian counterpart Hassan Rouhani later Wednesday.

In a joint statement on Tuesday, France, Germany and the UK did not specifically address the issue of US sanctions on European companies, but said their governments remained committed to ensuring the “continuation of the economic benefits of the agreement for the benefit of the world, economy and the Iranian people.”

The UK government updated its guidelines on exporting to Iran shortly after Trump’s announcement Tuesday, saying the re-imposition of the US sanctions against Iran “may have implications for UK businesses and individuals dealing with Iran.” It advised companies to seek legal advice where necessary.

Smith said it was unclear whether Trump would actually impose sanctions on EU companies that continue to deal with Iran, adding that the threat may be strategic, and that the administration could eventually end up granting exemptions.

Vakil said it was now up to Europe to keep the deal alive and protect investment in Iran. “The ball is in the EU’s court,” she said. “I’m skeptical that companies are going to stay in Iran because the risks are so high.”