Bloomberg News - Euro-Funded Carry Trades for Emerging Markets Are Back in Vogue

By Lilian Karunungan

As the emerging-market carry trade roars back, there’s a growing consensus that the euro is the best currency to fund it.

Of 21 potential developing-nation carry trades funded in the common currency tracked by Bloomberg 18 of them made money so far this year, given returns of about 8 percent in the ruble. Implied volatility in developing-nation currencies has also dropped to a 10-month low as major central banks including the Federal Reserve turn dovish and amid optimism over a progress in the U.S.-China trade talks, making the strategy attractive.

The euro is giving investors seeking to exploit differences in global borrowing costs more bang for the buck this year as the region’s deep slowdown leave little room for the European Central Bank to tighten any time soon, Bank of America Merrill Lynch, DBS Group Holdings Ltd. and Bank of Singapore Ltd. say. Market sentiment on the currency is also being affected by threats of the U.S. auto tariffs and a “no-deal” Brexit, helping build the case to buy those of nations with higher interest rates, they said.

“Using the euro as a funding currency and being long EM is not a bad strategy because it helps to circumvent or take out some of the trade-war risk on carry trade,” said Claudio Piron, co-head of Asian currency and rates strategy in Singapore at Bank of America. “Given the downward momentum of the euro zone’s economy and negative rates then it seems like it also reinforces the strategy.”

Hedging Trade War

Trades using the common currency have raced ahead as Germany releaseddata in mid-January showing it ended 2018 with the weakest growth since 2013, while ECB President Mario Draghi said later that month the euro zone’s risks had moved to the downside.

The attraction of using the euro is that the currency tends to decline when trade tensions between the U.S. and China escalate because Germany, Europe’s biggest economy, has a high export content to China, said Piron.

The euro’s three-month deposit rate of minus 0.36 percent compares with 2.63 percent for the dollar, meaning the shared currency would need to strengthen about 3 percent to wipe out the benefits of using it for funding. The euro is forecast to rise to 1.16 per dollar by the end-June from the current spot rate of 1.14, according to the median estimate in a Bloomberg survey of 59 analysts done in February and January.

Exploiting Weaker Growth

“The euro has performed well in a carry trade, but it has a lot to do with the weak European numbers at a time when the market is hoping for an easing in trade tensions, and of course, the Fed becoming more friendly in terms of its rate-hike expectations,” said Philip Wee, a senior currency economist at DBS in Singapore. “I see this more as tactical.”

For BNP Paribas Asset Management, a large part of the gains from carry trades is “now at least behind” for the short term as interest-rate expectations have also moderated in various developing economies, lowering the carry potential, Karan Talwar, senior investment specialist in Hong Kong, said in an emailed reply.

Even so, the recent decline in volatility of developing-nation currencies has been a tailwind to the strategy. In a carry trade, currency market moves can erase those profits from investing in a country with higher interest rates with funds in a country with low borrowing costs.

Those funded by the dollar have returned 2.4 percent this year against a basket of 10 emerging-market currencies including the Brazilian real, Turkish lira, South African rand, Indonesian rupiah and the Russian ruble, according to data compiled by Bloomberg. And trades using the euro have gained even more at 3.7 percent.

The euro is a “good idea” as a carry source because its yield is much lower than the dollar and is unlikely to rally sharply unless there’s a complete change in the Brexit situation, said Rajeev De Mello, chief investment officer at Bank of Singapore. “I’m positive of the higher yielding currencies in Asia: the rupiah. All the higher yielders should do well in this time of stability of the U.S. rates.”

BBC News - Brexit: No-deal impact assessment published

Image copyrightPA

The government has published its assessment of the impact of a no-deal Brexit on business and trade.

The report said "some food prices are likely to increase" and customs checks could cost business £13bn a year in a no-deal scenario.

It also said there was "little evidence that businesses are preparing in earnest".

But the government said it had undertaken "significant action" to prepare for no deal on 29 March.

It comes as the PM has promised MPs votes on delaying Brexit or ruling out no deal, if her deal is rejected again.

Theresa May's Brexit deal was comprehensively rejected by MPs on 15 January and she has said they will get a second chance to vote on it - possibly with some changes - by 12 March.

The UK is currently due to leave the EU on 29 March - with or without a deal.

The government's report, which was drawn up for the cabinet, said: "One of the most visible ways in which the UK would be affected by delays in goods crossing the Channel is our food supply, 30% of which comes from the EU."

Possible disruption to cross-Channel trade "would lead to reduced availability and choice of products", the document said.

"This would not lead to an overall shortage of food in the UK, and less than one in 10 food items would be directly affected by any delays across the short Channel crossings.

"However, at the time of year we will be leaving the EU, the UK is particularly reliant on the short Channel crossings for fresh fruit and vegetables.

"In the absence of other action from government, some food prices are likely to increase, and there is a risk that consumer behaviour could exacerbate, or create, shortages in this scenario.

"As of February 2019, many businesses in the food supply industry are unprepared for a no-deal scenario."

It repeated analysis suggesting a no-deal scenario could leave the UK economy 6.3% to 9% smaller after 15 years, compared to what it would have been.

It said the worst-hit areas economically in a no-deal scenario would be Wales (-8.1%), Scotland (-8.0%), Northern Ireland (-9.1%) and the north east (-10.5%).

Image copyrightGETTY IMAGES

The document said slightly more than two-thirds of the government's most critical preparation projects - and fewer than 85% overall - were "on track" for completion in time for 29 March.

It also warned that a no-deal Brexit would "affect the viability of many businesses across Northern Ireland", and said some businesses could relocate to the Republic of Ireland.

The publication of the document follows a proposed amendment last month from former Conservative MP Anna Soubry and backed by ex-Labour MP Chuka Umunna - who are both now members of the newly-formed Independent Group.

In the Commons, Ms Soubry told MPs that the document was only a summary and she asked for access to the papers "which actually go into the detail", which she was shown in privy council terms (confidential terms).

"It's the detail that actually fully explains the impact of a no-deal Brexit, leaving the Brexit Secretary to comment that it would be 'ruinous' for this country," she said.

Deputy speaker Lindsay Hoyle said he was "sorry" that Ms Soubry felt she had been "slightly short-changed on what would be available".

"I would expect ministers to take on board your request and hopefully... you will pursue it other than on this point of order," he said.

And Mr Umunna said the report painted "a disastrous picture of the catastrophe which would befall our country if there is a no-deal Brexit".

"In light of what she knows, it is utterly irresponsible for the Prime Minister to keep a no-deal Brexit on the table given the extreme damage it will do," he said.

"These papers set out how food prices will rise, we may see panic buying, there will be severe disruption at the border, and jobs and livelihoods would immediately be put at risk.

"Today she told the House of Commons she is listening, but MPs have passed a motion rejecting a no-deal Brexit and yet she refuses to request an extension of the Article 50 process in order to stop no-deal happening."

Ms Soubry's amendment instructed the government to publish within seven days "the most recent official briefing document relating to business and trade on the implications of a no-deal Brexit presented to cabinet".

It drew the backing of some mostly Remain-supporting Labour and Conservative backbenchers.

But Ms Soubry withdrew the amendment after Brexit Minister Chris Heaton-Harris indicated that Cabinet Office Minister David Lidington would meet her and would be publishing the relevant information.

Reuters News - House set to vote to end Trump's border wall 'emergency'

WASHINGTON (Reuters) - The U.S. House of Representatives votes on Tuesday on a resolution to terminate President Donald Trump’s declaration of a national emergency to build a wall on the border with Mexico.

House Democrats introduced the resolution last week, challenging Trump’s assertion that he could take money Congress had appropriated for other activities and use it to build the wall.

The resolution is expected to sail easily through the Democratic-controlled House. Action then moves to the Republican-majority Senate, where the measure’s future is uncertain even though it only requires a simple majority to pass.

While Tuesday’s vote will be another chapter in a long-running fight between Trump and Democrats over border security and immigration policy, it also will be a test of constitutional separation of powers, as it is the House and Senate that primarily dictate spending priorities, not the president.

The No. 2 House Democrat, Representative Steny Hoyer, said at a press conference on Monday that he had traveled to the U.S.-Mexico border twice in the past few weeks.

“What I concluded is there is no crisis at the border. The issue ... will be whether there is a crisis of our constitutional adherence,” Hoyer said.

At least two Republican senators, Susan Collins and Lisa Murkowski, have told the media they are likely to vote for the measure. But at least another two Republican votes would be needed if the resolution is to pass that chamber, assuming all Democrats and two independents back it.

Trump, who declared the national emergency this month after Congress declined his request for $5.7 billion to help build a border wall, vowed last week to veto the measure if it passes both chambers.

Congress would then have to muster the two-thirds majority necessary - a high hurdle - to override the president’s veto in order for the measure to take effect.

A bipartisan group of 58 former national security officials issued a statement Monday saying there was no “factual basis” for Trump’s emergency declaration.

Lawmakers must not allow “any president (to) on a whim declare emergencies, simply because he or she can’t get their way in the Congress,” Senate Democratic Leader Chuck Schumer declared Monday.

Schumer warned Trump’s emergency declaration “could cannibalize funding from worthy projects all over the country,” noting that the administration had not even decided yet what projects to take the funds from.

About 226 House lawmakers are co-sponsoring the bill, including all but a handful of Democrats as well as one Republican, Justin Amash.

The issue is also in the courts. A coalition of 16 U.S. states led by California have sued Trump and top members of his administration to block his emergency declaration.

Congress this month appropriated $1.37 billion for building border barriers following a battle with Trump, which included a 35-day partial government shutdown - the longest in U.S. history - when agency funding lapsed on Dec. 22.

Reporting by Susan Cornwell and Richard Cowan; Editing by Tom Brown

Our Standards:The Thomson Reuters Trust Principles.

BBC News - US to delay further tariffs on Chinese goods

Image copyrightAFP

Image captionPresident Trump met China's Vice Premier Liu He on Friday

President Donald Trump has announced that the US will delay imposing further trade tariffs on Chinese goods.

The rise in import duties on Chinese goods from 10% to 25% was meant to come into effect on 1 March.

Mr Trump told reporters that the US and China had made "substantial progress" in trade talks over the weekend.

He added that he was planning a summit with Chinese President Xi Jinping in Florida to cement the trade deal if more progress was made.

A report from China's official news agency Xinhua also noted "substantial progress" on specific issues such as technology transfer, intellectual property protection and agriculture.

Mr Trump's decision to delay tariff hikes on $200bn (£153bn) worth of Chinese goods was seen as a sign that the two sides are making progress on settling their damaging trade war.

Stock markets in Asia, which have been sensitive to the dispute, rose on Monday.

Last week, Mr Trump noted progress in the latest round of negotiations in Washington, including an agreement on currency manipulation, though no details were disclosed.

Sources told CNBC on Friday that China had committed to buying up to $1.2tn in US goods, but there had been no progress on the intellectual property issues.

The US accuses China of stealing intellectual property from American firms, forcing them to transfer technology to China.

The trade war between the two countries has disrupted businesses and stoked fears about the impact on the global economy.

Reuters News - Amid trade talks, China urges U.S. to respect its right to develop, prosper

BEIJING (Reuters) - The United States should respect China’s right to develop and become prosperous, the Chinese government’s top diplomat told a visiting U.S. delegation, reiterating that the country’s doors to the outside world would open wider.

The world’s two largest economies began their latest round of trade talks this week to resolve a bitter dispute in which each has levied tariffs on imports from the other.

The United States has accused China of unfair trade practices, including forced technology transfers, charges it has denied.

Respect and cooperation are the correct choice for both countries, something the international community hopes to see, State Councillor Wang Yi told the delegation of U.S. business leaders and former officials in Beijing on Tuesday.

“Just like the United States, China also has the right to development, and the Chinese people also have the right to have a good life,” the foreign ministry paraphrased Wang as saying, in a statement issued on Wednesday.

“The U.S. side should recognize that China’s development is in the world’s interest, as well as the United States’. Only by seeing China’s development as an opportunity for the United States can this help resolve certain problems, including trade and economic ones,” Wang said.

China’s reform and steps to open up are in line with its development needs, and its doors to the outside world will open ever wider, he added, repeating previous government pledges.

“As long as China and the United States proactively meet each other halfway, then trade and economic cooperation can still play a role as a ballast stone in Sino-U.S. ties,” he said.

The U.S. delegation included former U.S. National Security Adviser Stephen Hadley, U.S. Chamber of Commerce Executive Vice President Myron Brilliant, and U.S. Chamber of Commerce China Center President Jeremie Waterman.

On Tuesday, President Donald Trump said trade talks with China were going well and suggested he was open to pushing back the March 1 deadline to complete negotiations, saying it was not a “magical” date.

Tariffs on $200 billion worth of Chinese imports are set to rise to 25 percent from 10 percent by March 1 if the partners do not settle their trade dispute, but Trump has suggested several times that he would be open to postponing the deadline.

Negotiations in Washington this week follow a week of talks in the Chinese capital that ended last week without a deal but which officials said had brought progress on some key issues.

Widely-read tabloid the Global Times, published by the ruling Communist Party’s official People’s Daily, said in a Wednesday editorial that both sides must remain calm during the current talks, but that Washington must not force anything on Beijing.

“U.S. demand for China’s structural reform must stay in line with China-U.S. trade cooperation and coordinate with China’s reform and opening-up. The talks must not try to force Beijing to change its economic governance or even its development path,” it said.

“China and the U.S. must sign an agreement that will inspire their people, heralding accelerated economic development.”

Reporting by Ben Blanchard; Editing by Clarence Fernandez and Darren Schuettler

Our Standards:The Thomson Reuters Trust Principles.

Bloomberg News - HSBC Says Global Tensions Mean Uncertainty After Profit Misses

By Harry Wilson and Alfred Liu

HSBC Holdings Plc warned that geopolitical uncertainty in China, the U.S. and the U.K. has made the prognosis for the year far less predictable after fourth-quarter earnings fell short of analysts’ estimates.

Chief Executive Officer John Flint has also vowed to keep a keener eye on costs after a disappointing quarter capped his first year in charge of Europe’s largest bank. Like its rivals, HSBC, which gets most of its business in Asia, was hit by the meltdown in financial markets, which pushed investment bank revenues lower. Its shares fell 2.9 percent in early London trading.

“There are more risks to global economic growth than this time last year, and we remain alive and responsive to all possibilities,” Chairman Mark Tucker said. “The system of global trade remains subject to political pressure, and differences between China and the U.S. will likely continue to inform sentiment in 2019.”

Pressure is growing on HSBC’s management to improve returns by repurchasing stock, and the bank said it’s committed to its previous policy of returning capital to shareholders. However, HSBC stopped short of announcing a new buyback program, which analysts at Jefferies called a "notable disappointment."

“Prospects for enhanced capital repatriation against slower growth prospects have formed the key part of our constructive stance,” the Jefferies analysts, including Joseph Dickerson, said in a note. “This aspect of our thesis is clearly not playing out.”

“We are clearly going to moderate the pace of some of our investment,” Flint also said in an interview, though he didn’t provide details, saying the bank is “still having those conversations.” HSBC won’t have to resort to any major job cuts to keep a lid on expenses, he said.

Adjusted pretax profit, which excludes one-time items, fell 1 percent to $3.39 billion in the three months ended Dec. 31, missing the $4.4 billion consensus average derived from estimates compiled by the bank. Global markets, which houses HSBC’s investment bank, said adjusted revenue was $1.1 billion, an approximate 16 percent decline from the final three months of 2017.

Flint vowed to slow spending as he seeks to deliver on a key promise to shareholders: That revenue gains outpace cost increases, a trend HSBC refers to as positive jaws. He failed to achieve that in his first year at the helm, in part because of the fourth-quarter equities meltdown that also inflicted pain on the bank’s biggest rivals, including UBS Group AG. HSBC said it’s committed to achieving positive jaws this year.

In a statement issued with the earnings, HSBC said it was committed to the targets it announced in June. Among those targets for 2020:

• Accelerate growth from Asia by achieving high single-digit revenue increases each year
• Turn around its U.S. business with a more than 6 percent return on average tangible equity
• Complete set up of U.K. ring-fenced bank; grow mortgage market share and commercial customer base.
• HSBC switched CEOs last year, elevating Flint to replace Stuart Gulliver, bringing to an end a seven-year term marked by asset sales, job cuts and a pivot toward Asia.

BBC News - Saudi Arabia signs $20bn in deals with Pakistan

Saudi Arabia has pledged investment deals worth $20bn (£15.5bn) with Pakistan which is seeking to bolster its fragile economy.

The deals include funding for an $8bn oil refinery in the city of Gwadar.

It comes as part of a high-profile Asian tour by the kingdom's Crown Prince Mohammed bin Salman.

Pakistan is suffering a financial crisis. It has only $8bn left in foreign reserves and is looking to international backers for support.

Prime Minister Imran Khan has been seeking help from friendly countries in order to cut the size of the bailout package his country is likely to need from the International Monetary Fund, under very strict conditions.

The country is seeking its 13th bailout since the late 1980s and Saudi Arabia has already provided a $6bn loan.

Pakistan also said it would confer its highest civilian honour on the Saudi crown prince, the Order of Pakistan, a day after the investment deals were finalised.

The move is at odds with other countries who have condemned the Kingdom over its role in the murder of dissident journalist Jamal Khashoggi last year.

Saudi Arabia and Pakistan signed provisional agreements and memorandums of understanding in the energy, petrochemicals and mining sectors, according to reports.

Of the latest deals, Prince bin Salman said: "It's big for phase one, and definitely [our commercial relationship] will grow every month and every year, and it will be beneficial to both countries."

Charm offensive

Pakistan is the first stop on an Asian tour by the crown prince, known as MBS. He is scheduled to be in India by Tuesday and will visit China on Thursday and Friday.

The prince is seeking to recast his international image in the wake of the Jamal Khashoggi affair. The journalist was murdered at the Saudi consulate in Istanbul in October.

Image captionPakistan needs Saudi money to stave off a huge IMF bail-out - but this is not a one-way relationship

Against this backdrop, the current tour can be seen as a charm offensive by MBS, who is seeking to bolster relationships with dependable allies as he doles out cash, says the BBC's Abid Hussain.

While Pakistan stands to benefit from Saudi Arabia's largesse, the south Asian country is also important to the kingdom.

The two countries have a long-standing military relationship and the MBS visit comes at a time when geopolitics in the region are shifting - including concerns over the influence of Iran.

BBC News - US-China trade talks break up without deal

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Trade talks between the US and China have broken up without a deal, with the US warning that "very difficult issues" remain unresolved.

The talks in China this week were aimed at securing a new deal before further US tariffs are imposed on 1 March.

China said negotiations would now continue in the US next week.

"We feel that we have to make headway on some very, very important and very difficult issues," said top US trade negotiator Robert Lighthizer.

However, he said he was "hopeful" of progress.

President Xi Jinping said he hoped talks next week would "continue to work hard to promote a mutually beneficial and win-win agreement."

The two countries have been locked in an escalating trade war, imposing duties on billions of dollars worth of one another's goods.

In December, both countries agreed to halt new tariffs for 90 days to allow for talks.

The US has said it will increase tariff rates on $200bn worth of Chinese imports from 10% to 25% if the two sides do not strike a deal by 1 March.

But President Trump recently hinted that this deadline could be extended if they are making good progress in negotiations with China.

Could a trade deal be imminent?

By Andrew Walker, BBC World Service economics correspondent

It's a relatively optimistic tone from officials on both sides and at very senior levels too: President Xi himself for China and two US Cabinet level figures, in the shape of the Treasury Secretary and the US Trade Representative.

Talks to continue in Washington next week. So is (trade) peace imminent?

That would be a rash assumption to make. We have had warm words before and the big ask from the US side is difficult for China.

The next stage in China's economic development really does need technology and they will not easily agree to give up the practice of expecting foreign investors to share theirs.

That said, a willingness to continue talking as soon as next week, does suggest some reason for hope.

What has caused the fallout between the US and China?

Washington is pressing Beijing to make changes to its economic policies, which it says unfairly favour domestic companies through subsidies and other support.

The US has also accused the government of supporting technology theft as part of its broader development strategy. It wants to bring down its large trade deficit with the Asian powerhouse and wants China to buy more US goods.

China has proposed to increase purchases of US goods, such as semiconductors and soybeans, but is unlikely to let up on its economic development model, according to media reports.

There is also a sense among some in China that the US is using the trade war to contain its rise, as the two superpowers jostle for global leadership.

Countries elsewhere have also become wary of China's rise. Several governments have blocked telecoms companies from using equipment made by Huawei, the Chinese telecoms giant, in next-generation 5G mobile networks due to security concerns.

What has happened in the trade war so far?

The US has imposed tariffs on $250bn worth of Chinese goods, and China has retaliated by imposing duties on $110bn of US products.

Mr Trump has also threatened further tariffs on an additional $267bn worth of Chinese products - which would see virtually all of Chinese imports into the US become subject to these tariffs.