China’s $200 billion offer to Trump
|The U.S. says China has offered a $200 billion cut in its trade surplus with the world’s largest economy, while Trump has told reporters that he doesn’t consider Libya a model for denuclearization negotiations with North Korea. Here are some of the things people in markets are talking about.
Trump Dashes Trade Hopes…
China has offered President Donald Trump a $200 billion reduction in its annual trade surplus with the U.S. by increasing imports of American products and other steps, said a Trump administration official. China made the offer as the world’s largest economies resumed negotiations — this time in Washington — to avoid a damaging trade war, the official said, speaking on condition of anonymity. However Trump said he doubts the U.S. and China can come to an agreement over trade. “Will that be successful? I tend to doubt it,” he said in a briefing. The sides are expected to exchange new proposals during the top-level talks on Thursday and Friday in Washington, National Economic Council director Larry Kudlow said. Chinese Vice Premier Liu He is also scheduled to meet with Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer, according to the White House.
…And Decries ‘Libya Model’ for North Korea
Trump rebutted his national security adviser, telling reporters that he didn’t consider the nuclear disarmament of Libya a model for negotiations with North Korea. “The Libya model isn’t a model we have at all” for North Korea, Trump said Thursday during a meeting at the White House. Meanwhile, the two sides were dialing up rhetoric ahead of the meeting. North Korea warned of a “rupture” in ties with South Korea. “Unless the serious situation which led to the suspension of the North-South high-level talks is settled, it will never be easy to sit face to face again with the present regime of South Korea,” the statement on KCNA said. In the U.S., Trump said Chinese President Xi Jinping “could be influencing” Kim after the regime’s shift to a negative tone this week. Separately, a Pentagon report said North Korea has staked its survival on nuclear weapons, signaling the difficulty in seeking a complete denuclearization of the Korea peninsula.
El-Erian’s Emerging Market Warning
Debt levels that quadrupled in a decade have made emerging markets vulnerable to tightening financial conditions in the era of rising U.S. interest rates, Fitch Ratings said. Outstanding debt securities from developing nations have ballooned to $19 trillion from $5 trillion a decade earlier, the credit-rating company said in a report. Despite the development of local-currency bond markets, borrowers will be hobbled by higher external borrowing costs, a stronger dollar and slowdown of capital inflows, the report said. It follows comments from Mohamed El-Erian, who warned of the “trifecta” of higher oil prices, rising interest rates and an appreciating dollar.
Toshiba Deal is (Finally) a Go
Toshiba got regulatory approval from China for the sale of its memory chip business, clearing the way for the 2 trillion yen ($18 billion) deal with a group led by Bain Capital. The sale of the semiconductor business will take place on June 1 after approval was gained from all necessary regulators, the Tokyo-based company said in a statement Thursday. Toshiba put the business up for sale more than a year ago as it sought to repair a balance sheet hammered by billions of dollars worth of losses from a push into nuclear energy. Bain’s group includes SK Hynix Inc., Apple Inc., Hoya Corp. and Seagate Technology Plc, with Toshiba to retain a stake in the business.
Asian shares are set for a slightly higher open — though still on track for a weekly loss — after U.S. stocks ended a back-and-forth session lower, Treasuries fell and the dollar advanced. Japanese CPI tops Friday’s economic agenda. Forecasters expect the report to show inflation slowed to 0.7 percent in April, but a downside surprise would cement market expectations that BOJ Governor Haruhiko Kuroda has little chance to begin discussing a withdrawal of unprecedented monetary stimulus. After savage misses for both GDP and machine orders, even a “meets expectations” report may be well received by the market.
What we’ve been reading
This is what’s caught our eye over the last 24 hours.
And finally, here’s what David’s interested in this morning
Since it’s Friday, let’s take a big step back and have a look at the lay of the land from 30,000 feet up. The chart below tracks relative value using the difference in price-to-book ratios between the S&P 500 and the MSCI Emerging Markets Index. In short, U.S. stocks are now the most expensive relative to their emerging market counterparts in 15 years. You may have already noticed thatthings have a strange palindrome element to them, so by the same token, EM stocks are now at the cheapest relative to their U.S. peers over the same time period. The neutral observer would say the spread between the two is about as wide as the market has allowed it to get since the dotcom crash. Whatever the prevailing market conditions during those times we hit our heads on this level, I would imagine relative value kicked in eventually and kept the difference honest. One key takeaway is that it’s hard to imagine multiples in the U.S. expanding further if this current compression across emerging markets persists. If you believe anything above 3 percent on the 10-year treasury slaps a temporary cap on EM valuations, then by consequence don’t expect U.S. equities to push up while higher rates — despite being a reflection of a strong U.S. economy — are viewed elsewhere as generally bad for risk.