|North Korea’s peace push gives the U.S. leverage. JPMorgan predicts dire trade-war related job losses for China. And a super typhoon has its sights set on Asia. Here are some of the things people in markets are talking about.
JPMorgan’s Trade-War Tally
The tariff battle with the U.S. will probably cost China 700,000 jobs, or more in the event of further escalation. The job losses would come if the U.S. imposes 25 percent tariffs on $200 billion in Chinese exports and China retaliates by devaluing its currency by 5 percent and adding to levies on U.S. goods, according to economists led by Haibin Zhu at JPMorgan Chase & Co. If China doesn’t retaliate at all, 3 million people could lose their jobs, they wrote in a research note Tuesday. The study highlights the more profound impacts of the tariff battle on the world’s second largest economy, which is grappling with a slowing pace of growth and a massive debt pile. Things may get even worse: if the U.S. imposes 25 percent tariffs on all Chinese imports and China retaliates with the levies already announced, the measures will mean 5.5 million lost jobs and 1.3 percentage points cut off gross domestic product growth.
Kim’s Peace Push Gives Trump Leverage
Three months after U.S. President Donald Trump’s historic handshake with Kim Jong Un, the North Korean leader is holding up talks over one consequential demand: a declaration ending the Korean War. For Trump, the request presents a dilemma. Granting it could guarantee himself another headline-grabbing moment to play the peacemaker weeks before a pivotal midterm election. Withholding it could give the U.S. a second chance to win real concessions in its goal of eliminating the regime’s nuclear threat. Either way, the prospect of a peace declaration to end the 70-year conflict is one of the biggest pieces of leverage Trump has left in dealing with Kim without going back to “fire and fury” threats of nuclear war. The stakes are high: Any peace declaration will bolster arguments for easing sanctions and scaling back the American military presence in South Korea.
Super Typhoon Heads for Asia
A super typhoon is intensifying in the Pacific and is forecast to barrel through the Philippines and Taiwan this week before heading to Hong Kong and south China. Mangkhut, classified by the Hong Kong Observatory as a super typhoon, is forecast to pack maximum winds of 230 kilometers (143 miles) per hour by Friday before gradually weakening. The typhoon, expected to be closer to south China by the weekend, will bring heavy rains and storm surges on its trail. Mangkhut, to be named Ompong once it enters the Philippines, is expected to be 135 nautical miles (250 kilometers) off Kaohsiung in southern Taiwan on Sept. 15 before heading to Hong Kong, according to the U.S. agency.
Telecom, Tech Boosts U.S. Stocks
U.S. stocks gained as the technology sector rebounded and energy-related shares rallied with oil. Treasury two-year note yields rose to a decade high with the U.S. selling debt and expectations become cemented for more Federal Reserve rate increases. Crude rose the most since June as Hurricane Florence threatened U.S. East Coast gasoline markets and sanctions began crimping Iranian oil exports. The S&P 500 and Nasdaq rose for a second day, while the Dow recovered from Monday’s losses after investors shook off lingering anxiety about U.S. and Chinese trade relations. In emerging markets, shares fell while a gauge of currencies was little changed. Hong Kong stocks will be in focus Wednesday after the Hang Seng entered a bear market.
China Turns to WTO
China will ask the World Trade Organization this month for permission to retaliate against the U.S. for failure to comply with a dispute ruling that found some of its anti-dumping rules to be illegal. On Sept. 21, China will ask the Geneva-based organization to sanction trade retaliation against certain U.S. products, according to a Tuesday statement from the WTO. China asked the WTO to approve annual retaliatory trade measures against $7 billion in U.S. goods, according to a separate release. The WTO ruled in 2017 that the U.S. actions were illegal and an arbitrator called for compliance by Aug. 22. On Aug. 27, the U.S. acknowledged that it had not fully complied and said it “continued to consult with interested parties on options to address the recommendations” of the dispute settlement body, according to a statement.
What we’ve been reading
This is what caught our eye over the last 24 hours.
And finally, here’s what David’s interested in this morning
If you believe sentiment surrounding the Chinese currency is going to deteriorate, Patrick Bennett of CIBC thinks the right (and likely safer) way to bet on that thesis is to avoid shorting the currency outright in the spot market but rather just going long on USD-CNH forward points. I’ve put that on a chart below and the 12-month is at above 920 pips. Obviously, Bennett expects forward points to blow out further. He notes that China’s central bank has started removing some liquidity in the offshore currency space. That’s pushed up forward points. As the tide rises, that means the funding cost of long-dollar positions (or the cost of shorting the yuan) also goes up. And by placing your chips in the forwards market, you also largely avoid the risk of getting taken to the cleaners whenever the People’s Bank of China decides to anchor spot rates.
The underlying thesis here is the path of least resistance for the dollar is up. With Beijing looking to put a floor on growth, the currency is either a means to that end or collateral damage. While Bennett doesn’t think forward points will widen back to above the 3,000 level, he still thinks these 900+ levels don’t quite account for the larger risks ahead.