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China May Have $5.8 Trillion Hidden Debt With 'Titanic' Risk

Published: 09:15 18 Oct 2018 BST

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Video commentary for October 17th 2018

 

 

Eoin Treacy's view

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: Wall Street rebounds from its lows, Treasuries ease, Dollar firm, China is the epicentre of risk, India led lower by banks, oil and gold stable.  

 

 

China May Have $5.8 Trillion Hidden Debt With 'Titanic' Risk

This article by Eric Lam for Bloomberg may be of interest to subscribers. Here is a section:

The focus on funding to sustain growth at the local level echoes a broader shift in the central government, which last year was focused on reducing leverage in the financial system. That phase is essentially over, thanks in part to an escalating trade war with the U.S., according to Citigroup Inc. analysts.

“The markets are right, in our view, to feel more concerned about the sustainability of China’s debt and the increased financial risks,” said Liu Li-Gang, chief China economist at Citigroup in Hong Kong. He also saw “renewed pressure” on the yuan.

Even with the central government’s shift toward stimulus, however, S&P sees Beijing determined to “bring discipline to the financing practices of local governments and their LGFVs.” That ultimately may mean local authorities aren’t fully able to keep LGFVs afloat, however, and the bottom line is “the default risk of LGFVs is increasing.”

 

Eoin Treacy's view

Last week China announced it was increasing the number of Systemically Important Financial Institutions (SIFIs). That measure is aimed at clearly signaling there is a group of banks the government is going to support come what may. That’s not so unusual but it does raise the broader question of what about the rest?

 

 

Trump Opens New Front in His Battle With China: International Shipping

This article by Glenn Thrush for the New York Times represents a further deterioration in the US/China international relationship. Here is a section:

The withdrawal is part of a concerted push by Mr. Trump to counter China’s dominance and punish it for what the administration says is a pattern of unfair trade practices. The move is expected to be announced on Wednesday, according to senior administration officials.

The Universal Postal Union treaty, first drafted in 1874, sets fees that national postal services charge to deliver mail and small parcels to countries around the world. Since 1969, poor and developing countries — including China — have been assessed lower rates than wealthier countries in Europe and North America.

While the lower rates were intended to foster development in Asia and Africa, Chinese companies now make up about 60 percent of packages shipped into the country, taking advantage of the lower rates to ship clothing, household gadgets and consumer electronics. Many websites now offer free shipping from China, in part because of the cheap postal rates, administration officials say.

 

Eoin Treacy's view

Privately-owned Chinese companies are among the largest third-party sellers on major internet venues like eBay and to a lesser extent Amazon. A US based seller pays a minimum of $2.66 for a small package with tracking from the US Postal Service. Sellers from China pay domestic local rates on international shipping. It might take longer to arrive but there is no way to beat Chinese sellers on price and particularly for small-sized goods.

 

 

Brexit Used to Mean Brexit. What Does it Mean Now?

This article by John Authers, formerly from the FT, now at Bloomberg may be of interest. Here is a section:

It is only in the last few weeks that the FTSE 250 has dropped meaningfully further behind the rest of the world’s stock markets compared with its position immediately after the referendum. There is a similar outcome if we look at the pound on a trade-weighted basis as calculated by Deutsche Bank AG:

On this basis, the pound remains almost 20 percent weaker than its 2015 peak, but it is also some 5 percent stronger than at its recent low in October 2016, when May first unveiled her plan to seek what is now known as a “hard Brexit,” in which the UK left the EU without attempting to stay in the EU’s tariff-free single market, in a speech to the Conservative party’s conference.

The pound’s resilience is remarkable given the great level of uncertainty. This is in large part because the issues now rest almost entirely on U.K. politics. Broad outlines of a deal have been thrashed out. The risk that the EU, a cumbersome body if ever there was one, rejects a final deal are not trivial, but by far the greatest risk is that no deal can pass the U.K. parliament. Foreign-exchange strategy notes on sterling are now almost entirely taken up with the mathematics of Westminster.

So, avoiding the technical niceties of trade and immigration policy, the source of greatest uncertainty is the U.K.’s parliament, where four broad political options remain
possible:

* It agrees to a “deal” on its future relationship with the EU;
* It goes ahead with a “no deal” option, with future trading relations with the EU bloc set by World Trade Organization rules;
* It votes down a deal and a general election (to vote in an entirely new House of Commons) is called; 
* It votes down a deal and another referendum on Brexit (known as a “People’s Vote” to its supporters) is called.

There is great difference between these options, and great political risk. But neither the stock market nor the foreign-exchange market appears to see the situation as much more alarming than it was at the end of June 2016.

 

Eoin Treacy's view

None of the negotiating parties have much of an incentive to conclude the talks so offering the UK an additional year for a transition agreement is a fresh sign that the Europeans see talks going on even longer than previously anticipated. For Theresa May’s part she has to take any deal agreed back to parliament where her weakened government faces the real threat of being defeated or relying heavily on the opposition. This is not new news which is why the Pound has been relatively stable against the Euro.

 

 

'Wake 'n Bake,' Plunging Stocks Greet Canada's Legal Pot Debut

This article by Kristine Owram, Doug Alexander and Jen Skerritt for Bloomberg may be of interest to subscribers. Here is a section:

“The eyes of the world are on Canada and Canadians should feel very proud, because people have been fighting for decades to make this moment a reality,” said Brendan Kennedy, chief executive officer of Tilray Inc., the largest cannabis company by market value.

After running up dramatic gains in the lead-up to legalization, cannabis shares failed to join the party Wednesday. Aurora Cannabis Inc. had slumped as much as 15 percent by 10:17 a.m. in Toronto for the worst drop since February, before paring losses. Canopy Growth Corp. was down 3.4 percent at 1:15 p.m. and Tilray Inc., the world’s largest pot company by market value, fell 6 percent.

Medical marijuana has been legal in Canada since 2001 but it’s only been about four years since the first cannabis companies began to list on Canadian exchanges. In that short time, about 140 pot companies have gone public in Canada, with a combined market value of more than C$60 billion ($48 billion).

 

Eoin Treacy's view

I’m reminded of Mark Twain’s quip that reports of his death are greatly exaggerated. There was certainly some evidence of buy the rumour, sell the news today as some people took the day of legalisation as an opportunity to realise profits but the declines seen need to be put in the context of the advances seen over the last couple of months and the broad consistency of the medium-term trends.

 

 

Long-term themes review October 4th 2018

 

 

Eoin Treacy's view

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

 

 

The 49th year of The Chart Seminar

 

 

Eoin Treacy's view

The next Chart Seminar will be held on 12 and 13 November 2018 at The Army and Navy Club in London.

If you have an interest in attending an online Chart Seminar please contact Sarah and we will arrange times based on the time zones of those who wish to attend.

I am also in initial discussions with a potential partner about organising a New York Seminar.

If you would like to attend or have a suggestion for another venue please feel to reach out to Sarah at sarah@fullertreacymoney.com.  

The full rate for The Chart Seminar is £1799 + VAT. (Please note US, Australian and Asian delegates, as non EU residents are not liable for VAT). Subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.

 

 

 

 

 

 

 

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