Submitted by Michael Every of Rabobank
“I saw the best funds of my generation destroyed by madness, starving hysterical naked, dragging themselves through the negative-yield streets at dawn looking for an angry fix.”
(With apologies to Alan Ginsberg.)
Well, it final happened. Back to the late 17th century, UK gilts had never been issued with negative yield. Until yesterday, the same day the BoE made clearer it is seriously contemplating entering the mirror world of being paid to borrow, which Japan and Europe are already deep into. Who said the UK isn’t European at heart, eh? Marginally lower rates, lower GBP as a result, and a whole host of acronyms to try to keep yield curves from killing the banking sector will now be flowing out of Threadneedle Street.
The Fed still doesn’t want to go negative, but as Philip Marey makes clear their latest minutes show they are prepared for a second wave of the coronavirus outbreak; the FOMC intends to make its forward guidance on rates more explicit; it may also provide more clarity regarding its asset purchases; it remains ready to expand its special lending facilities; and. finally, seems more interested in yield curve control. Don’t expect very high yields for as far as they eye can see – just not sub-zero ones either.
Meanwhile, howls abound in foreign policy and geopolitics.
This week has already seen the Nasdaq limit Chinese IPOs; yesterday saw the US senate pass legislation that would effectively force Chinese firms to delist from US exchanges (do you think the House can’t pass the same, or that Trump would then veto it in an election year?); and Republican senator (and tipped 2024 presidential candidate) Josh Hawley presented a speech as a pillar in the intellectual architecture of what the US actually wants: “The international order as we have known it for thirty years is breaking. Now imperialist China seeks to remake the world in its own image, and to bend the global economy to its will….We must recognise that the economic system designed by Western policy makers at the end of the Cold War does not serve our purposes in this new era.”
Hawley is pushing to leave the WTO outright. That seems unlikely for now - but the US is moving towards the inverse of what happened in the 1930s, when Germany, Italy, and Japan simply left the League of Nations when it no longer fitted their political world view. If the US cannot get institutions that work for it, it can and could walk away: WTO; WHO; UN; open capital markets. Don’t take anything for granted. Recall the US did not even join the League of Nations!
In market terms, we already see Bloomberg noting Chinese firms may shift their listings to Hong Kong to avoid US restrictions; but it isn’t as if Hong Kong is not caught in the eye of this storm itself. China has just accused the US of “blackmail” in its stance towards the Hong Kong government, and potential US policy action still looms in the background as a risk.
If all this is too highfalutin for you, there is always Twitter. Here are the recent cream of the crop from US President Trump:
“China is on a massive disinformation campaign because they are desperate to have Sleep Joe Biden win the presidential race so they can continue to rip-off the United States, as they have done for decades, until I came along! Spokesman speaks stupidly on behalf of China, trying desperately to deflect the pain and carnage that their country spread throughout the world. Its disinformation and propaganda attack on the United States and Europe is a disgrace…it all comes from the top. They could have easily stopped the plague, but they didn’t!”
That comes dangerously close to finger pointing at Xi Jinping, something Trump has so far not done and which may be a bridge that can only be burned once. Of course, the editor of China’s Global Times is not as restrained in his burns:
“On the contrary, Chinese netizens wish for your reelection because you can make America eccentric and thus hateful for the world. You help promote unity in China and you make intl news as fun as comedy. Chinese netizens call you ‘Jianguo’, meaning ‘help to construct China’.”
Somewhere in here the optimists will tell you that a there is a phase one trade deal trying to get out.
Meanwhile, Bloomberg reports that China is pushing ahead with a $1.4 trillion six-year plan of digital Keynesianism backed by Xi himself, both to boost growth, benefit Chinese tech giants at the expense of US firms, and move away from a reliance on US technology imports completely. If China does this it will ensure that the phase one deal is dead as the US exports the very highest tech and commodities to China - and it both can’t and won’t be just a primary commodity producer. It will also help ensure a Balkanisation of global tech systems and markets. And don’t think this is just a US-China issue. Australia has just been called a “giant kangaroo that serves as a dog of the US” - and there is talk of further threats to Aussie exports, such as dairy, fruit, and seafood.
But there is just one other small problem for China: they don’t have $1.4 trillion – not if they don’t have any exports they don’t. (On which front, Japanese data today saw exports for April -21.9% y/y, and Korea’s first 20-days of May data were -20.3% y/y). China has infinite CNY, as does everybody with a sovereign currency. It just has to hope it can boost state investment by USD1.4 trillion and not see a current-account deficit that pushes CNY off a cliff, especially with no capital inflows if the US hawks get their way.
Logically, the only way that external deficit doesn’t happen is if the US and world does not act as China dumps foreign technology imports and/or if the state investment push is mirrored by higher private-sector saving….in which case there is no GDP boost! Cue howls from those who don’t understand how these balance-sheet dynamics actually work. Or the geopolitics of it.
At least the trend towards negative rates makes more sense against this backdrop. Rates are marching lower and deficits higher everywhere; the RBNZ --who started inflation targeting-- is likely to expand QE and is actively leaning on banks to lower their mortgage rates; and the first US 20-year Treasury auction since 1986 flew out the door yesterday. More to come. More to come.