Thursday, July 20, 2017

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Thursday, July 20, Morning Global Market Roundup: Asia Stocks Hit Near-Decade High

By Nichola Saminather
July 20, 2017

Asian shares rose to their highest levels in nearly a decade on Thursday, bolstered by a surge in global markets, while the yen eased after the Bank of Japan reinforced expectations that it will keep massive stimulus in place far longer than other major central banks.

European markets were also set for a positive start, with financial spreadbetter CMC Markets expecting Britain's FTSE 100 and France's CAC 40 to open up 0.1 percent and Germany's DAX to start the day 0.2 percent higher.

MSCI's broadest index of Asia-Pacific shares outside Japan added 0.1 percent, hovering near its highest level since December 2007.

Australian stocks rose 0.5 percent and South Korea's KOSPI was up 0.3 percent.

Chinese blue chips advanced 0.1 percent, while the Shanghai Composite edged up 0.2 percent. Hong Kong's Hang Seng crept up 0.2 percent.

The MSCI World index inched up in its 10th straight session of gains and set a record high for the sixth consecutive day, lifted by all-time closing highs on Wall Street in the wake of strong earnings reports.

"Fresh all-time highs had once again been printed on various US indices including the S&P 500 and the NASDAQ, inspired by earnings," Jingyi Pan, market strategist at IG in Singapore, wrote in a note.

"Gains in the U.S. and the higher crude prices are (helping) energize regional markets while earning reports in the Asian region will also be watched."

In currency markets, the yen weakened after the BOJ once again pushed back its projected timing for hitting its 2 percent inflation target, as it cut price forecasts until fiscal year 2020.

The yen slipped 0.2 percent to trade at 112.135 yen to the dollar following the BOJ decision. The weaker yen helped the Nikkei extend gains to 0.6 percent.

The euro was steady at $1.1511 on Thursday, ahead of a meeting of the European Central Bank later in the session.

The common currency hit 14-month high this week following seemingly hawkish comments by ECB President Mario Draghi.

At Thursday's meeting, the ECB may drop a reference to its readiness to increase the size or duration of its asset-purchase program before announcing in the autumn how and when it will start winding down its bond buying.

"The euro has surged enormously on the back of hopes that the ECB is going to start the process of shutting the door on loose monetary policy," Naeem Aslam, chief market analyst at ThinkMarkets UK, wrote in a note.

"The ECB needs to be clear about its forward guidance and it should reinforce that in a subtle manner. Coming out of the gates too aggressively would create shock waves in the market."

The dollar index, which tracks the greenback against a basket of trade-weighted peers, rose 0.1 percent to 94.894.

The Australian dollar set a new two-year high on Thursday, still heady from the minutes of the last Reserve Bank of Australia meeting, released Tuesday, which showed the central bank had turned more upbeat on the economic outlook.

It pulled back from that high to trade down 0.2 percent from Wednesday's close at $0.7939.

The Canadian dollar was 0.1 percent weaker at C$1.262 to the dollar. On Tuesday, it touched a 14-month high on record domestic factory sales and stronger oil prices.

Oil prices dipped after hitting a two-week peak on Wednesday on a bigger-than-expected weekly draw in crude and gasoline inventories in the United States.

U.S. crude eased less than 0.1 percent to $47.10 a barrel, after jumping 1.6 percent overnight.

Global benchmark Brent also lost nearly 0.1 percent to $49.67, holding on to most of Wednesday's 1.8 percent gain.

Gold slid as the dollar pulled higher, falling 0.15 percent to $1,238.10 an ounce on Thursday.

Article Link To Reuters:

Oil Steady After Big Drop In U.S. Fuel Stocks, But Markets Remain Bloated

By Fergus Jensen
July 20, 2017

Oil prices held steady on Thursday, hanging on to gains made the previous session when falling U.S. crude stocks lifted the market, as analysts offered mixed supply outlooks for the commodity ahead of a key OPEC meeting next week.

Crude oil prices are still capped below the key $50-per-barrel mark on concerns about high supplies from the Organization of the Petroleum Exporting Countries (OPEC) despite its pledge to cut output along with non-OPEC producers.

Brent crude futures, the international benchmark for oil prices, were at $49.66 per barrel, just 2 cents down from their last settlement.

U.S. West Texas Intermediate (WTI) crude futures were at $47.10 per barrel, 2 cents below their last close.

Prices jumped more than 1.5 percent in the previous sessions for both crudes on a report showing U.S. crude and fuel stocks fell in the United States last week.

"Both contracts now face some significant technical resistance ahead, which may give traders some pause for thought after crude's impressive one-week rally," said Jeffrey Halley of futures brokerage OANDA.

U.S. crude inventories fell by 4.7 million barrels in the week to July 14, according to data from the Energy Information Administration, against analyst expectations for a decrease of 3.2 million barrels.

"Over the past 15 weeks, U.S. oil inventories have fallen ... 13 times, and in most cases, the falls were more pronounced than expected," said Fawad Razaqzada, market analyst at futures brokerage

"Yet, U.S. crude oil inventories still remain near the upper half of the average for this time of the year," he added.

The ongoing high U.S. inventories - crude stocks are now just over 490 million barrels - as well as high output from OPEC are preventing prices from rising much further, traders said.

OPEC and non-OPEC producers are due to meet in St. Petersburg, Russia, next Monday to discuss the current situation in oil markets. OPEC, along with Russia and other non-member producers, has pledged to cut production by 1.8 million barrels per day (bpd) between January this year and March 2018.

A lack of compliance by some, though, and exemptions for Nigeria and Libya have undermined that OPEC-led effort, preventing prices from rising by much.

Analysts, however, pointed to rising political risk factors, including potential U.S. sanctions on Venezuela and tensions in the Middle East and North Africa, that could impact oil prices.

"We don't expect to see this quietness to last forever, as geopolitical risks are rising again," ANZ bank said in a note.

Article Link To Reuters:

Three Years Into Cheap Oil, Gulf Is Still Depending On A Rebound

Low prices combined with output cuts are weighing on growth; Isolation of Qatar has added to perception of regional risks.

By Ahmed Feteha
July 20, 2017

Energy-rich Gulf Arab nations have scrambled to adjust to the slump in oil prices since 2014. Three years on, their economies are mired in weak growth and largely just as dependent on crude as they ever were.

The six members of the Gulf Cooperation Council have curtailed subsidies and introduced new taxes to bolster non-oil revenue and reduce ballooning budget deficits. Much of the savings, however, have been due to spending cuts and the pace of reforms has slowed across the region, said Monica Malik, chief economist at Abu Dhabi Commercial Bank. Overall progress in economic diversification has been limited, she said.

Absent a rebound in oil prices, analysts say it’s unlikely that these nations can repair their finances without deeper spending cuts that could further hurt growth. The standoff between a Saudi-led bloc and Qatar is also undermining investor confidence at a time when the GCC is seeking foreign funds.

Five charts illustrate oil’s dominance and the challenges facing the region.

First-quarter budget data from Saudi Arabia and Oman showed an improvement in their budget deficits alongside higher oil revenue, after the price of Brent crude rose to as high as $57.10 per barrel in January. It has since retreated under $50, well below what the two nations need to balance their budgets.

Saudi Arabia, OPEC’s biggest producer, increased non-oil revenue in 2016 and introduced taxes on tobacco products and soda drinks in June this year. The government, however, reversed a decision to cut the bonuses and some allowances of state employees. A second round of subsidy cuts will also likely be delayed to later in 2017 or early next year, according to people with knowledge of the matter.

Risk Perception

The average cost of protecting government bonds of Saudi Arabia, the U.A.E., Kuwait and Qatar was at a three-year low about six weeks ago, when the Qatar dispute erupted. It has since jumped by about 40 percent to 94 basis points, according to data compiled by Bloomberg.

“The Qatar situation has an added an element on the political and economic risk side, so it is not surprising to see risk perceptions going up,” said David Butter, associate fellow at Chatham House in London. “Most countries in the GCC are still in relatively solid financial positions,” he said, but there are “underlying issues” around the long-term sustainability.

Growth Suffers

Austerity measures and oil-output cuts are weighing on economic growth in the region. The Saudi economy contracted in the first three months of this year for the first time since 2009. The International Monetary Fund expects average growth in the GCC to slow to 0.9 percent this year, compared with 5 percent during the last oil boom between 2000 and 2013.

“We’re going to see poor levels of growth across the GCC on lower oil production, although they’ve been helped in the first quarter by the relatively higher prices,” Butter said.

Vulnerable Pair

Bahrain and Oman have the lowest credit ratings of the GCC nations, with less oil to sell, thinner fiscal buffers and in Bahrain’s case, more debt. That picture is unlikely to change unless crude prices rise dramatically. Bahrain needs $101.1 a barrel for its budget to break even, the highest among Middle East and North African net oil exporters, according to the IMF.

Oman’s budget deficit soared to about 21 percent of GDP last year, the highest in the GCC. Official data shows little progress made on fiscal consolidation in the first four months of this year.

Blessing In Disguise?

Yet for Qatar, the world’s biggest exporter of liquefied natural gas, the economy’s reliance on hydrocarbons is proving to be a blessing in disguise. Revenue from LNG and oil exports has remained intact through the diplomatic row.

And while Standard Chartered Plc economists expect Qatar’s non-oil economy to slow this year as a result of the crisis, they still see overall gross domestic product expanding 2.5 percent -- little changed from 2016.

Article Link To Bloomberg:

Facebook In Talks With Publishers On Supporting Subscription Models

By Anya George Tharakan and Sheila Dang
July 20, 2017

Facebook Inc (FB.O) is in early talks with several news publishers about how its social media site can better support subscription business models, the company's head of news partnerships, Campbell Brown, said in a statement on Wednesday.

The statement comes a day after TheStreet reported that Facebook plans to launch a subscription-based news product, citing comments by Brown at a conference. Facebook will begin initial tests in October, TheStreet reported.

The feature is likely to allow publishers to create a paywall on Facebook's Instant Articles and guide readers to a publisher's home page to opt for a digital subscription, according to TheStreet.

Instant Articles lets publishers post articles directly to the Facebook app.

The idea for a paywall is based on premium and metered plans and has been in the works for a while, TheStreet said, citing Brown at the Digital Publishing Innovation Summit in New York.

Facebook also started the roll-out of a new tool that allows publishers using Instant Articles to measure how those articles perform compared with their own mobile websites.

Shares of Facebook closed up 0.79 percent at $164.14 on Wednesday.

Article Link To Reuters:

Amazon Launches Shopping Social Network Spark For iOS

By Angela Moon
July 20, 2017 Inc (AMZN.O) has launched a social feature called Spark that allows members to showcase and purchase products on its platforms, the retail giant's first clear move into the world of social media.

Spark, which is currently only available for Amazon's premium paying Prime members, encourages users to share photos and videos, just like popular social media platforms Instagram and Pinterest. The new feature publicly launched on Tuesday for use on mobile devices that use Apple's (AAPL.O) iOS operating system.

Spark users can tag products on their posts that are available on Amazon and anyone browsing the feeds can instantly find and purchase them on the platform. Users can also respond to posts with "smiles," equivalent to Facebook's "likes."

"We created Spark to allow customers to discover - and shop - stories and ideas from a community that likes what they like," said an Amazon spokeswoman.

"When customers first visit Spark, they select at least five interests they'd like to follow and we'll create a feed of relevant content contributed by others. Customers shop their feed by tapping on product links or photos with the shopping bag icon."

Amazon has also invited publishers including paid influencers and bloggers to post on Spark. Their posts are identified with a sponsored hashtag.

Many Amazon users on social media called the service a cross between Instagram and Pinterest with a touch of e-commerce.

Brand strategist Jill Richardson‏ (@jillfran8) said: "Been messing with #AmazonSpark all morning and I am LIVING. It's like Pinterest, Instagram, and my credit card had a baby and it's beautiful."

Community manager Lucas Miller‏ (@lucasmiller3) also tweeted: "So #amazonspark is going to be a dangerous pastime. The app is already too easy to shop..."

Amazon shares closed up 0.2 percent at $1,026.87 on Wednesday.

Article Link To Reuters:

Musk Says First Passengers On SpaceX Rockets Must Be ‘Brave’

SpaceX CEO discusses prospects for human space travel; First attempt of Falcon Heavy rocket launch will ‘be exciting.’

By Alan Levin
July 20, 2017

Elon Musk tamped down expectations about Space Exploration Technologies Corp.’s new rocket designed to carry private citizens into space, saying whoever chooses to be among the first passengers will need to be "brave."

The SpaceX Falcon Heavy, a rocket with two extra boosters attached and a total of 27 engines that must fire simultaneously, will have enormous stresses and has been difficult to test on the ground, Musk said Wednesday in Washington.

He jokingly urged attendees of a conference on the International Space Station to watch the first attempted launch.

"It’s guaranteed to be exciting,” he said. When asked whether the risks would make potential customers pause before signing up for a flight, he said: "I want to make sure we set expectations accordingly."

SpaceX has an ambitious agenda for the cosmos in coming years. The company began taking deposits from private citizens for a trip around the moon on the Falcon Heavy rocket. And it is working with NASA to carry astronauts to the International Space Station. But the company has only transported cargo so far, and Musk said shifting to carrying passengers is “a huge step up.”

Getting certified to carry NASA astronauts has been a challenge for SpaceX, as there is a much higher bar than transporting hardware for the agency, Musk said. He called NASA’s oversight for "really tough" but justified because of the potential risks to humans.

"It’s the right motivation,” he said.

SpaceX and NASA are now working through some “small technical bones of contention" for certification to carry passengers, he said. Meanwhile, the U.S. Federal Aviation Administration, which regulates commercial space flight separately from NASA, hasn’t yet set certification standards for carrying private citizens for hire.

The company continues its attempts to reuse more of its rockets and launch equipment, a more-efficient approach that has been the biggest innovation in space flight in recent years, Musk said.

SpaceX has successfully landed its rocket boosters and used them again. It’s now "quite close" to being able to reuse the fairing that clamps over the rocket’s payload, a relatively light-weight aerodynamic cover, he said.

The fairing costs between $5 and $6 million. "Imagine we have a pallet of cash worth $6 million dollars falling through the sky," Musk said he has told his staff. "Would we try to catch it? I say we do."

He didn’t provide details about how the fairing would be captured.

Musk’s talk on Wednesday was to an overwhelmingly friendly audience of scientists as eager as he is to explore space. Topics ranged from how his project to build tunnels to stem the Los Angeles region’s traffic congestion might help colonize Mars to the health risks of traveling beyond Earth’s atmosphere.

He downplayed the potential for human conflict on Mars, calling it "pretty open territory" where competing entities could find plenty of room without challenging each others’ claims. After praising NASA and noting it stood to get increased federal funding, he drew applause.

The billionaire entrepreneur said development of the Falcon Heavy had been much tougher than he imagined. By adding two additional boosters to each side of a rocket, it added to the vibrations, created new stresses to the main rocket and was difficult to test without an actual launch.

"There is a lot of risk associated with Falcon Heavy, a real good chance that that vehicle doesn’t make it to orbit," he said. "I’m saying full disclosure here, man."

Government reviews have echoed some of his concerns. The Government Accountability Office found earlier this year that SpaceX and competitor Boeing Co. must contend with potential safety hazards that may postpone approvals for transporting astronauts until 2019. A U.S. contract with Russia for transportation to the space station expires that year.

The GAO’s findings follow a September report by NASA’s Office of Inspector General, which warned of “multiple challenges that will likely delay the first routine flight carrying NASA astronauts to the ISS until late 2018.” Agency funding challenges, delays in NASA’s evaluation process and technical challenges with spacecraft designs have all contributed to the program falling behind schedule.

There have been two major mishaps with its rockets since 2015, a sign of how difficult rocket science can be.

On June 28, 2015, a SpaceX Falcon 9 rocket disintegrated shortly after launch from Cape Canaveral, Florida. Another Falcon 9 blew up on the ground in Florida.

But SpaceX has also had numerous successes, making it one of the most formidable companies in the space market. It has pioneered reusable rockets, for example, which it has successfully landed in Cape Canaveral and on an ocean barge.

Article Link To Bloomberg:

Robots Take Over Retail Jobs

Wal-Mart and other large retailers, under pressure from Amazon, turn to technology to do workers’ rote tasks.

By Sarah Nassauer
The Wall Street Journal
July 20, 2017

Last August, a 55-year-old Wal-Mart WMT -0.43% employee found out her job was being taken over by a robot. Her task was to count cash and track the accuracy of the store’s books from a desk in a windowless backroom. She earned $13 an hour.

Instead, Wal-Mart Stores Inc. WMT -0.43% started using a hulking gray machine that counts eight bills per second and 3,000 coins a minute. The Cash360 machine digitally deposits money at the bank, earning interest for Wal-Mart sooner than if sent by armored car. And the machine uses software to predict how much cash is needed on a given day to reduce excess.

“They think it will be a more efficient way to process the money,” said the employee, who has worked with Wal-Mart for a decade.

Now almost all of Wal-Mart’s 4,700 U.S. stores have a Cash360 machine, making thousands of positions obsolete. Most of the employees in those positions moved into store jobs to improve service, said a Wal-Mart spokesman. More than 500 have left the company. The store accountant displaced last August is now a greeter at the front door, where she still earns $13 an hour.

“The role of service and customer-facing associates will always be there,” said Judith McKenna, Wal-Mart’s U.S. chief operating officer. But, she added, “there are interesting developments in technology that mean those roles shift and change over time.”

Shopping is moving online, hourly wages are rising and retail profits are shrinking—a formula that pressures retailers, ranging from Wal-Mart to Tiffany & Co., to find technology that can do the rote labor of retail workers or replace them altogether.

As Inc. makes direct inroads into traditional retail with its plans to buy grocer Whole Foods Market  Inc., Wal-Mart and other large retailers are under renewed pressure to invest heavily to keep up.

Economists say many retail jobs are ripe for automation. A 2015 report by Citi Research, co-authored with researchers from the Oxford Martin School, found that two-thirds of U.S. retail jobs are at “high risk” of disappearing by 2030.

Self-checkout lanes can replace cashiers. Autonomous vehicles could handle package delivery or warehouse inventory. Even more complex tasks like suggesting what toy or shirt a shopper might want could be handled by a computer with access to a shopper’s buying history, similar to what already happens online today.

“The primary predictor for automation is how routine a task is,” said Ebrahim Rahbari, an economist at Citi Research. “A big issue is that retail is a sizable percentage of the workforce.”

Nearly 16 million people, or 11% of nonfarm U.S. jobs, are in the retail industry, mostly as cashiers or salespeople. The industry eclipsed the shrinking manufacturing sector as the biggest employer 15 years ago. Now, as stores close, retail jobs are disappearing. Since January, the U.S. economy has lost about 71,000 retail jobs, according to data from the Bureau of Labor Statistics.

“The decline of retail jobs, should it occur on a large scale—as seems likely long-term—will make the labor market even less hospitable for a group of workers who already face limited opportunities for stable, well-paid employment,” said David Autor, an economist at the Massachusetts Institute of Technology.

Earlier this year, Beverly Henderson took a pay cut and gave up her health-care benefits when she left Wal-Mart in the wake of the back-office changes. “I’m 59 years old,” she said. “I never worked on the floor. I’ve always worked office positions and I had no desire.”

She is now an office manager at a local business she says can’t afford to give her the same perks or $16.75 an hour she made after 16 years with Wal-Mart.

“I would have never left Wal-Mart. They were paying me decent,” said the Southport, N.C., resident.

At Wal-Mart, Ms. Henderson managed store invoices, a job the company used technology to mostly centralize.

Automation is filtering through many parts of retail. Tiffany is using machines to polish basic pieces, like silver jewelry, during the production process. Home Depot Inc. now has self-checkouts in most stores and is testing adding scanner guns to make them useful for shoppers buying bulky products like lumber.

“We want to simplify the stores so that we can free up our associates…so they can focus on selling,” Carol Tomé, Home Depot’s chief financial officer, said in an interview.

Wal-Mart has long squeezed efficiency out of its business, both in stores and throughout its vast supply chain. Although it employs 1.5 million people in the U.S., it has around 15% fewer workers per square foot of store than a decade ago, according to an analysis by The Wall Street Journal.

Some Wal-Mart stores are experimenting with touch screens to let shoppers process returns. Self-checkouts are becoming a larger percentage of its total registers, according to a person familiar with company strategy.

Several of Wal-Mart’s published patent applications propose technology to improve customer service. One describes a system that uses facial recognitionto detect customer dissatisfaction and adjust staffing accordingly. In addition, jobs at hundreds of stores are shifting to support new services such as grocery pickup for digital orders.

In two stores, Wal-Mart is testing touch-screen displays that show shoppers the differences between devices like internet-connected speakers and thermostats. “We don’t need an associate to understand how that works, but the associate is there to service customers and check them out,” said Ms. McKenna.

The Cash360 machines in the back of stores allow cashiers to process the money for electronic depositing, after scanning their hands for unique vein patterns.

The goal isn’t to reduce a retailer’s staff, said Brian McCabe, the president of the subsidiary of security firm G4S PLC that developed the cash-management system with Bank of America Corp. “We can optimize labor,” he said. “How a given retailer exercises that benefit or opportunity is up to them.”

Article Link To The WSJ:

U.S., Canada, Mexico Agree On Fast-Paced NAFTA Talks

By Anthony Esposito and David Ljunggren
July 20, 2017

U.S., Mexican and Canadian officials have agreed to an aggressive timetable to renegotiate the North American Free Trade Agreement (NAFTA), sources said, aiming to conclude early next year to avoid Mexico’s 2018 presidential elections.

The plan is to hold seven rounds of talks at three-week intervals, according to two Mexican officials who asked not to be identified because of the sensitivity of the issue.

Described by one Mexican official as a "very aggressive calendar," the sources said the goal was to conclude the talks before the electoral campaign was in full swing.

Negotiators fear the renegotiation process could become a political punching bag in Mexico due to President Donald Trump's repeated swipes at Mexico and as Andres Manuel Lopez Obrador from the leftist National Regeneration Movement (MORENA) party leads a number of early polls for next year's election.

Trump has pushed for a renegotiation of NAFTA, threatening to dump it if he cannot rework the accord to the benefit of the United States. He argues it has fueled a trade deficit with Mexico and cost thousands of U.S. jobs.

The first round of talks to upgrade the accord underpinning over a trillion dollars of trilateral trade between the United States, Mexico and Canada is due to take place in Washington from Aug. 16-20, U.S. Trade Representative Robert Lighthizer said on Wednesday.

The talks will alternate sites among the three countries and the second round is slated to happen in Mexico, one of the Mexican sources said. However, a U.S. Trade Representative spokesperson said the countries have not all agreed to the number of rounds and the frequency of talks.

A well-placed Canadian source familiar with discussions said the United States had proposed the "staggering" schedule but could also not confirm whether an agreement had been reached on the timetable.

U.S. administration officials said Mexico had asked for the negotiations to be completed by the end of the year before the Mexican presidential election heats up.

Lighthizer has said he hopes the negotiations could be wrapped up by the end of the year, while noting that he was not prepared to set a deadline for the talks. John Melle, assistant U.S. trade representative for the Western Hemisphere, will lead the day-to-day negotiations of NAFTA for the United States.

Lighthizer, who by U.S. rules is the chief NAFTA negotiator, said in June that completing the negotiations by the year end was a "very, very quick time frame and we're not going to have a bad agreement to save time."

Impact On Immigration

David MacNaughton, Canada's ambassador to Washington, told reporters on Tuesday, "Obviously if we could get a clarification of the trading relationship sooner rather than later, it would be better, but having said that, we're not going to rush into a bad deal."

Canadian officials said there is no chance of making substantial changes to NAFTA if talks wrap up by the end of 2017. Modernizing the pact in a serious way will take two years, they forecast.

After the United States unveiled on Monday its much-anticipated objectives for the renegotiation, the agenda was generally viewed as fairly limited in scope and greeted as such by Mexico and Canada.

A U.S. administration official and a congressional source said there were growing concerns within the Trump administration, on Capitol Hill and in the business community that Trump policies could embolden anti-U.S. populist Lopez Obrador, who has tapped into Mexico's resentment toward Trump.

Some see the series of recent high-level visits by Trump cabinet members to Mexico, including Homeland Security Secretary John Kelly, Secretary of State Rex Tillerson and Energy Secretary Rick Perry, as signs of those concerns.

U.S. officials caution that if things go badly on the trade front, Mexico would gain leverage on immigration. It has been praised by U.S. officials for curbing the flow of Central American immigrants through Mexico, but it could decide to reduce its border enforcement.

"If the current president of Mexico were to capitulate in any major way to Trump's unreasonable demands, then it would be a huge bonanza for Lopez Obrador," said Fred Bergsten, a senior fellow at the Peterson Institute for International Economics.

Article Link To Reuters:

Trump's Honeymoon With China Ends As Dialogue Turns Frosty

Economic talks end with no joint statement from two countries; Ross says trade imbalance not driven by market forces.

By Andrew Mayeda and Saleha Mohsin
July 20, 2017

The brief honeymoon between the world’s two largest economies appears to be over.

Three months ago, President Donald Trump had warm words for his Chinese counterpart Xi Jinping after the two leaders bonded at Trump’s Mar-a-Lago resort in Florida. Within weeks, the Trump administration was touting early wins in talks with China, including more access for U.S. beef and financial services as well as help in trying to rein in North Korea.

Now, the two sides can barely agree how to describe their disagreements.

High-level economic talks in Washington broke up Wednesday with the two superpowers unable to produce a joint statement. Commerce Secretary Wilbur Ross scolded China over its trade imbalance with the U.S. in his opening remarks, and then both sides canceled a planned closing news conference.

Trump campaigned on “protecting the forgotten man and putting America first, but if you can’t deliver their jobs back to them, the next best thing is to get them some retribution and that’s what’s happening here,” said Stephen Myrow, managing partner at research firm Beacon Policy Advisors LLC in Washington.

It was the first meeting under the Trump administration of the two countries’ most senior economic officials, a ritual that began in 2008. Rebranded as the Comprehensive Economic Dialogue this year, the discussions were led by Treasury Secretary Steven Mnuchin and Ross on the American side, and Vice Premier Wang Yang for the Chinese. Federal Reserve Chair Janet Yellen took part in the talks, and executives including Alibaba’s Jack Ma and Blackstone’s Stephen Schwarzman met on the sidelines.

Trade Irritants

As of Wednesday evening, the meeting produced no joint statement to reassure markets, as has been the practice since the talks began during the financial crisis. After last year’s forum, the two countries released a 6,589-word statement asserting the mutual interest they share in each other’s prosperity. The document also included commitments, such as one by China to reduce excess capacity in its steel industry -- still a major irritant as the Trump administration weighs whether to impose tariffs and quotas on steel imports.

"The Trump administration may have had unrealistic expectations of what China will do to balance trade," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. "Now it is the start of real hard negotiations."

At opening remarks by the two sides on Wednesday, Ross complained about the trade gap with China in unusually blunt terms. While U.S. exports to China have grown in recent years, imports from the Asian country have expanded even faster, leading to a $309 billion trade deficit, Ross said.

“If this were just the natural product of free-market forces, we could understand it, but it’s not,” Ross said, as Wang looked on. “So it’s time to rebalance in our trade and investment relationship in a more fair, equitable and reciprocal manner.”

In his opening remarks, Wang called cooperation “a realistic choice” for both countries, while adding his own view of how the U.S.-China relationship should proceed.

“Dialogue cannot immediately address all differences, but confrontation will immediately damage the interests of both,” Wang said, according to the state-run Xinhua News Agency.

Canceled Briefings

Shortly after, the Treasury sent an email to reporters saying the U.S. had canceled a news conference scheduled at the end of the day, when Mnuchin and Ross were to discuss the outcome of the meeting, which they expected to be concrete Chinese commitments. The Treasury department later emailed a notice that China had canceled its own media briefing.

Mnuchin and Ross issued a statement after talks that didn’t outline any new developments from Wednesday’s dialogue. “The principles of balance, fairness and reciprocity on matters of trade will continue to guide the American position so we can give American workers and businesses an opportunity to compete on a level playing field,’’ they said in the statement.

While confronting the Chinese over the U.S. trade deficit will play well politically in America, it’s not a good strategy for making progress with Chinese leaders, who are under their own political pressures at home, said David Loevinger, managing director of emerging markets sovereign research at TCW Group Inc.

The U.S. has had success by allying with economic reformers who will push back against “powerful vested interests” in China opposed to opening up its economy, said Loevinger, who played a leading role in economic talks with the Chinese as Treasury’s senior coordinator for China affairs in the Obama administration.

“In some ways the Teddy Roosevelt strategy of talking softly and carrying a big stick is effective with China, but in the administration’s case, they’re tweeting loudly with very little follow-up,” he said.

Article Link To Bloomberg: