· China’s yuan weakened on Tuesday and the Japanese yen reversed earlier losses after a report that the United States will keep tariffs on Chinese goods through the U.S. election hurt risk sentiment.
The news came a day before the signing of a preliminary U.S.-China trade agreement to ease an 18-month-old trade war. Bloomberg News reported that the United States will review and remove existing tariffs no sooner than 10 months after the deal is signed.
In the currency market, the U.S. dollar traded near flat at 97.387 against a basket off its peers, slipping from an earlier level around 97.562.
The yen gained to 109.92 after rising to 110.2, the most yen per dollar since May 23. The offshore yuan weakened to 6.89, after rising to 6.87 per dollar, the strongest since July 11.
The euro has fallen to $1.1130 from a five-month high of $1.1239 on Dec. 31.
· Phase 1 commodity targets likely more than China can chew: analysts
Commodity traders and analysts are struggling to map out how China will reach the eye-popping amounts it is committing to buy from the United States under Phase 1 of their trade deal.
China has pledged to buy $50 billion more in U.S. energy supplies, and will raise U.S. agriculture purchases by some $32 billion over two years above 2017’s $24 billion baseline, according to a source briefed on the deal to be signed on Wednesday. The deal also stipulates purchases of an additional $80 billion in manufactured goods.
Those totals would certainly trim the roughly $300 billion annual trade gap between the countries. However, analysts who study Chinese commodity flows remain skeptical that Beijing can absorb such quantities of U.S. goods without threatening trade ties with other suppliers, hurting its own domestic producers, and making substantial changes to import standards and quotas.
“Either China massively increases imports and reduces current account surplus from the current 1.5% of GDP, or it engages in trade diversion away from current providers of goods which compete with the U.S.” said Alicia Garcia Herrero, Chief Economist Asia Pacific at Natixis in Hong Kong. “I see this second scenario as much more likely.”
The $50 billion target is “too aggressive and unlikely to achieve”, said Seng Yick Tee, an analyst at SIA Energy in Beijing, adding that energy product exports from the United States to China were about $8 billion in 2017and 2018.
AGRICULTURE TARGET “SHOCKING”
The pledge to boost U.S. farm imports by over $30 billion over two years is “shocking” since that increment is more than the value of farm products it has purchased from the U.S. in a single year, said a China-based grains trader.
“It would make (more) sense if the $32 billion is the total number, not the increased number.”
Such a large fixed dollar-figure from one producer would also risk supply disruptions and distort international crop prices, said Iris Pang, Greater China economist at ING in Hong Kong.
“Prices of agri (commodities) from the rest of the world could be cheaper, especially after China cut import tariffs (in January). So even after retaliatory tariffs are removed, the U.S. will not have a competitive advantage over other economies,” she said.
Traders also questioned what products China could buy from the United States since African swine fever has dented demand for soybeans for animal feed and quotas to protect domestic farmers limit grain imports.
“China will, for sure, buy more soybeans, let’s say, 30 to 40 million tonnes. (For) wheat, maybe we can increase purchases within the import quota,” said a trader with a Chinese grain importer.
A third grains trader said: “If such volume (of products) come to China, it will be a disaster for us (in the domestic market).”
· U.S. to maintain tariffs on Chinese goods until Phase 2 deal: Mnuchin
The United States will maintain tariffs on Chinese goods until the completion of a second phase of a U.S.-China trade agreement, U.S. Treasury Secretary Steven Mnuchin said on Tuesday, a day before the two sides are to sign an interim deal.
· Phase one trade deal could be less than market hopes: ‘Tariffs have now become a roach motel’
Investors have been waiting for details of the “phase one” trade deal, expected to be signed between the U.S. and China Wednesday, but they may already know most of what’s in it and there may be little new.
Stocks have been buoyed by optimism around the deal for weeks now. Tuesday was no different, and the Dow, Nasdaq and S&P 500 were at all-time highs before a trade-related headline from a news service rattled markets and sent the indexes into negative territory.
Analysts have said there could be some volatility around the release of the trade deal details. An agreement that is very light on details with no teeth to stop trade abuses could potentially be seen as a negative. So stocks were rattled, when Bloomberg news service Tuesday afternoon reported that tariffs were not expected to be lifted until a phase two deal.
· Investment in the U.K.’s technology sector grew at a faster pace than in the U.S. and China last year, according to new research released Wednesday.
Venture capital funding for British start-ups grew 44% to a record $13.2 billion in 2019, a report prepared for the government by industry group Tech Nation and research firm Dealroom said.
By contrast, Dealroom’s figures show that investment in U.S. and Chinese tech firms actually slowed from January to December, with the U.S. seeing a 20% decline and China a steeper fall of 65%. The U.S. and China still came out on top in terms of total deal value, however, attracting $116 billion and $33.5 billion respectively.
· Swiss wealth giant UBS has predicted that the U.S. Federal Reserve could lower interest rates three times in 2020 — a forecast that differs widely from many other projections calling for no change or just one rate cut this year.
Arend Kapteyn, global head of economic research at UBS, said on Tuesday that tariffs implemented in the trade war between Washington and Beijing would drag down U.S. growth to just 0.5% year-on-year in the first half of 2020.
· Britain, France, Germany formally accuse Iran of breaking nuclear deal
Britain, France and Germany formally accused Iran on Tuesday of violating the terms of its 2015 agreement to curb its nuclear program, which eventually could lead to the reimposing of U.N. sanctions lifted under the deal.
· Oil prices climbed on Tuesday after five days of declines as the United States and China prepared to sign a preliminary trade deal and as Middle East tensions eased.
Brent crude gained 31 cents, or 0.5%, to trade at $64.51 per barrel. U.S. West Texas Intermediate crude futures rose 15 cents or 0.3% to settle at $58.23 per barrel.
That put WTI front-month futures on track to close below the second month for the first time since Nov. 19, which is known in the trading industry as contango.
In addition, oil also found technical support after WTI fell to a more than five-week low of $57.72 before bouncing off the 200-day moving average.
The outlook for oil demand was supported by the expected signing of a Phase 1 U.S.-China trade agreement on Wednesday, marking a major step in ending a dispute that has cut global growth and dented demand for oil.
China has pledged to buy more than $50 billion in energy supplies from the United States over the next two years, according to a source briefed on the trade deal.
Despite the trade dispute, China’s crude oil imports in 2019 surged 9.5% from the previous year, setting a record for a 17th straight year as demand growth from new refineries propelled purchases by the world’s top importer, data showed.
However, gains were limited as concerns about possible supply disruptions eased due to a decline in tensions in the Middle East.
Reference: CNBC, Reuters
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