Much is being made of the weekend story from Bloomberg News that China is honing in on only a limited deal in coming days. As I believe that the most important thing we can get out of China is the protection of our technology, and that is supposedly a part of a limited deal, I’m ok with that. I also believe that the administration will do anything they can not to have the tariffs on the last batch of $300b worth of consumer goods go thru (unfortunately it looks like tariffs on the other $250b will remain).
On the issue of China’s industrial policy and subsidies, I always thought it was unrealistic on our part to expect them to change their ways with that in any major way. In fact, every country in this world has some form of it. The US government has essentially subsidized the entire US housing market to use as an example. Look at our airports, local governments run them all vs many privatized airports overseas. European governments own stakes in a variety of European companies. The BoJ owns 75% of its ETF market and thus is a top 10 direct holder of many Japanese companies. None of this is good but it is what it is.
So this is where negative rate policy starts to go off the rails, when people start calculating the cost of losing money on their deposits vs digging holes in the ground to store the cash. Berliner Volksbank, Germany’s 2nd biggest co-op bank is now putting on a .5% tax on any deposits north of 100,000 euros. They are now one of 34 German banks that are now charging customers in some fashion. Last Thursday Spar Nord Bank in Denmark said they are taxing retail customers .75% (the level of their central banks deposit rate) on deposits above 750k kroner which is a bit above $100,000. It’s time to buy stocks of those companies that make shovels.
After another weekend of ever intensifying protests in Hong Kong, it’s getting very distressing to watch for this great city. I’m not going to pretend to know where this all goes in the short term but unfortunately we know Hong Kong will never be the same. Hopefully though it can transition gracefully at some point. Markets there were closed overnight but with stories that money is leaving HKD, its currency of course is a big focus as are HIBOR rates. This is a place with the most overvalued property market in the world that is now coming under major pressure.
In China, its FX reserves fell to $3.09T, the lowest since February and the offshore yuan is weaker by .3% in response (among other things). A growing piece of their reserves, albeit still very small, is gold as they’ve bought 100 tons so far this year after adding another 6 in September as prices have risen. They’ve doubled their holdings over the past 4 years.
German factory orders in August fell .6% m/o/m, more than the estimate of down .3% but July was revised up by 6 tenths so not as bad as feared. Versus last year though orders are still down 6.7% and have fallen for 15 straight months. The main weakness in August was within Germany as orders rose to the eurozone and outside of the region. As the news is not surprising and a bit old, the euro is little changed as are bund yields.
The October Sentix economic sentiment index fell to -16.8, the lowest since April 2013. They said “Fears of recession are and remain immanent.”
SENTIX ECONOMIC SENTIMENT
Jay Powell speaks tomorrow and I’ll repeat my belief that the question of an October cut or not could very well hinge on what comes of the China trade talks. Rosengren and George still don’t want to cut based on their comments over the past few days and we have to all of a sudden ask what defines ‘insurance’ and what transitions to ‘we need to really save the economy’ in terms of classifying what these rate cuts are intended to do. We of course don’t want to have cuts dealing with the latter.