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Why US-China trade talks will struggle to reach ‘grand bargain’

02 May 18
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President Donald Trump’s top advisers arrive in Beijing this week for talks on how to avoid a trade war between the world’s two biggest economies.

The United States and China have threatened recently to impose steep tariffs on tens of billions of dollars of each other’s goods.

The US team, which includes Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer, hopes to make enough progress in the negotiations on Thursday and Friday to dial down the tensions.

“I think we’ve got a very good chance of making a deal,” Trump said last week when he announced the visit.

Not everyone agrees with him.

Related: How China gets what it wants from American companies

“I don’t expect any grand bargains being struck,” said Michael Camunez, CEO of consultancy Monarch Global Strategies and a former senior trade official under President Barack Obama.

According to Camunez, the US administration isn’t projecting a coherent stance with a team of negotiators that includes trade hawks like Lighthizer and free trade advocates like Larry Kudlow, Trump’s top economic adviser.

“There is no clear strategy that can be discerned,” Camunez said.

Managing expectations

The Chinese government is already trying to reduce expectations for this week’s talks.

Given the size and complexity of the trade relationship, “it’s not realistic to expect to have all issues resolved through one consultation,” Chinese Foreign Ministry spokeswoman Hua Chunying said Wednesday.

“As long as the US maintains its sincerity in preserving the overall stability of bilateral trade ties, and adopts an attitude of mutual respect, equal consultations and win-win cooperation, we believe our consultations are going to be constructive,” she said.

Related: China tariffs would hurt these American companies

The Trump administration wants China to buy more US exports in the hope of cutting America’s $375 billion deficit in goods with its biggest trading partner. It’s also pressing Beijing to move away from an industrial policy that critics say subsidizes Chinese companies on the global stage and pressures foreign rivals to hand over key technologies.

But the best the United States can hope for this week is a “short-term bargain,” said Derek Scissors, a resident scholar at the American Enterprise Institute, a Washington-based think tank.

That might include China giving more details about its plans to open up its auto sector and pledging to increase imports from the United States. Scissors said a “credible promise” from Beijing to buy an additional $50 billion of US goods each year would be considered a win by Trump’s trade team, but he doesn’t think that’s likely to happen.

China is likely to find it hard to ramp up imports of American-made goods, experts say.

There just aren’t many additional “big ticket” items China needs from the United States, said Pauline Loong, head of Hong Kong research firm Asia Analytica.

Chinese businesses want high-tech US products. But the Trump administration sent an alarming signal last month by banning Chinese smartphone maker ZTE (ZTCOF) from buying components from American companies for seven years.

Rather than buying more American goods in substantial amounts, China is more likely to offer the possibility of greater access for foreign companies to its huge markets, Loong said.

Xi’s promises ‘not enough’

Chinese President Xi Jinping promised in a speech last month that the country would do more to open up its economy to foreign companies and investors.

But at a rally in Michigan in Saturday, Trump said Xi’s pledges were “not enough.”

Experts say China’s promises of greater access often turn out to be difficult for foreign companies to take advantage of because of delays or onerous requirements they need to meet.

Beijing “happily offers good intent,” Loong said. “But what it has always been reluctant to offer is specifics.”

Related: US business to Trump: Don’t go through with China tariffs

Late last year, the government said it would allow foreign companies to control Chinese banks and investment firms for the first time, in theory making it easier for Wall Street to do business in the country.

But Lyndon Chao, a managing director at the Asia Securities Industry & Financial Markets Association, said many foreign investment firms may struggle to qualify because of the amount of assets they’re required to hold in China.

American companies that already operate in China want the Trump administration to pressure Beijing to do more to stop theft of their intellectual property, counterfeiting and forced transfers of technology to Chinese firms, according to Jacob Parker, vice president of lobby group the US-China Business Council.

The issue has become a particular point of contention as China works to shift its economy from low-end manufacturing toward more high-tech industries.

Related: How did China end up posing as the defender of global trade?

Trump and his senior economic advisers have spoken out about the issues, citing them as a key reason for imposing tariffs. But Parker says business leaders worry that the administration’s obsession with the trade deficit, which many economists say is misplaced, reduces the likelihood of improving conditions for American companies.

“We’d like to see the Trump administration clearly articulate what it wants China to do,” he said.

— Steven Jiang contributed to this report.

Bank of America hauls in biggest profit ever

16 Apr 18
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How Bank of America ‘reset its compass’ after the financial crisis

Bank of America is minting money thanks to tax cuts, turbulent markets and the stronger economy.

America’s second-largest bank hauled in $6.9 billion in profit during the first three months of 2018. That’s the biggest quarterly profit in Bank of America’s history, taking out the previous record set in 2011.

The blockbuster earnings are at least partly because of President Trump’s corporate tax cuts.

Bank of America (BAC) paid Uncle Sam $1.5 billion in income tax, down 26% from last year, even though overall profit soared 30%.

The bank said the tax law lowered its effective tax rate by 9 percentage points. The new corporate tax rate is 21%, down from 35%.

Without the gift of the tax law, Bank of America’s results would have been less stellar. Pretax income rose a more modest 15%, while revenues ticked up just 4%.

Like other Wall Street firms, Bank of America benefited from the recent market mayhem. Clients rushed to execute buy and sell trading orders as they watched the Dow gyrate.

Bank of America’s sales and trading revenue jumped 6% to $4.1 billion. The bank said stock trading revenue surged by 38% to $1.5 billion. The company cited “increased client activity” and a strong trading performance in futures, options and other complex securities.

That helped offset a 13% decline in the trading of bonds, currencies and commodities trading revenue.

Even as many retail investors watched their investment portfolios shrink, Bank of America made money in its trading division on every day of the first quarter.

Related: Regulators push to shrink banks’ rainy-day fund by $121B

The healthy economy, both at home and abroad, also padded Bank of America’s bottom line.

Consumer banking revenue jumped 9% to $9 billion. Loans climbed 8%, and deposits ticked higher.

Bank of America disappointed some analysts because it beat estimates by cutting expenses, not because of stronger lending. The size of the bank’s loan book rose just slightly last quarter.

“If loan growth doesn’t materialize, then expenses might not matter,” Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods, wrote to clients on Monday.

Bank of America isn’t the only bank recording mega profits. JPMorgan Chase (JPM), the largest US bank, reported a 35% jump in earnings on Friday. The $8.7 billion profit was the largest by any US bank in history, according to S&P Global Market Intelligence.

Despite Bank of America’s financial success, the company cut its number of employees by 2,600, or 1%, over the past year. The company rewarded most employees with a one-time tax cut bonus of $1,000.

Large banks also continue to shut branches. Bank of America now has 4,435 branches across the United States. That’s down from 4,559 a year ago and 6,139 at the end of 2008, according to FactSet.

Customers continue to do more banking online. Bank of America counted 24.8 million active mobile banking users last quarter, up 12% from last year.

White House reportedly to threaten China with tech investment ban

13 Apr 18
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  • The Trump administration is planning to increase trade pressure on China by threatening to block Chinese technology investment in the United States, The Wall Street Journal says.
  • The Journal also says the U.S. may release details as early as next week on which Chinese products could be targeted in the administration’s preliminary call for 25 percent tariffs on $100 billion worth of imports.

President Donald Trump speaking April 12, 2018.

President Trump reconsiders TPP

The Trump administration is planning to increase trade pressure on China by threatening to block Chinese technology investment in the United States, The Wall Street Journal reported, citing officials familiar with the matter.

The Journal also said the U.S. may release details as early as next week on which Chinese products could be targeted in the administration’s preliminary call for 25 percent tariffs on $100 billion worth of imports. The report said the ban on Chinese investment in U.S. technology could be permanent.

Trump said last week he has asked the United States Trade Representative to consider $100 billion in additional tariffs against China. Last month, the U.S. slapped tariffs on up to $60 billion in annual Chinese imports.

Trade tensions between the U.S. and China have increased recently, as the Trump administration takes a more protectionist stance toward trade matters. These tensions have weighed on financial markets recently as investors fear a trade war between the two largest world economies may be around the corner.

Read The Wall Street Journal’s full report here.

Wells Fargo shares fall on fears strong first quarter profit may be reduced by regulatory settlement

13 Apr 18
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  • Wells Fargo’s first-quarter profit rose 5.5 percent.
  • Earnings per share of $1.12 beat expectations of $1.06.
  • The bank cautions that it’s still in settlement talks with federal regulators.

Wells Fargo‘s earnings beat expectations Friday, but the bank emphasized that the results could be revised depending on the outcome of talks with regulators over a possible $1 billion settlement.

The bank reported a 5.5 percent gain in first-quarter profit. Net income was $5.9 billion, or $1.12 a share beat the average analyst forecast of $1.06 from Thomson Reuters.

Revenue also beat expectations, coming in at $21.93 billion compared with the $21.73 billion forecast.

Shares fell more than 2 percent in morning trading.

People walk by a Wells Fargo bank branch on October 13, 2017 in New York City.

Spencer Platt | Getty Images
People walk by a Wells Fargo bank branch on October 13, 2017 in New York City.

The settlement talks with regulators concern sales of certain auto insurance and mortgage products. The company has struggled to overcome a spate of regulatory issues for more than a year after disclosing in 2016 that branch employees had opened millions of accounts without customers’ knowledge. Since then, questions about the bank’s sales tactics have spread to mortgage, auto insurance and wealth management activities.

In February, the Federal Reserve slapped it with sanctions for failing to have adequate risk controls that could have detected issues in its sales practices. It is still talking with the Consumer Finance Protection Bureau and the Office of the Comptroller of the Currency about settling over the auto insurance and mortgage rate lock sales practices.

“I’m confident that our outstanding team will continue to transform Wells Fargo into a better, stronger company; however, we recognize that it will take time to put all of our challenges behind us,” CEO Tim Sloan said in a statement on Friday.

The bank said it is making progress on hitting planned expense savings that aim to cut costs by $4 billion by the end of next year. It expects to cut expenses by $2 billion annually by the end of this year.

Wells Fargo has also significantly increased purchases of its own stock, up 78 percent since last year, to $2.1 billion.

Also Friday, Citigroup and J.P. Morgan reported earnings that beat on the top and bottom lines.

The Global Trading Map Looks Really Confusing Right Now

13 Apr 18
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By Dany Burger and Sid Verma


You aren’t just imagining it: global markets are flashing conflicting signals as they struggle to price trade friction, an easing of global synchronized growth, and the excesses of an aging bull market.

 It’s a case of choose-your-narrative: A vanilla risk-on/risk-off trading climate, late-cycle dynamics that signal a sustained drop, or plain old U.S. stock volatility. Regardless, the current trading map is confounding Wall Street strategists and investors.
“There’s no clear theme in the market and no easy way of playing that,” said Steven Englander, head of research and strategy at Rafiki Capital. “With trade issues, the biggest impact will be on corporate profits so it’s clearly bad for some equities. When it comes to FX, it’s more ambiguous.”
The challenge was underscored this week as markets were whiplashed by fears over protectionism and Middle Eastern conflicts before a relief rally spurred by President Donald Trump’s conciliatory remarks on trade. Stocks are heading toward a weekly gain, while the Treasury curve is the flattest in more than a decade — an indication of subdued long-term growth prospects and, to some, looming recession risks.

“It’s a puzzling time for markets, with contradictions in returns, vol. and correlations,” quantitative strategists at HSBC Holdings Plc including Daniel Fenn wrote in a note.

Here we sketch the vexed trading climate in charts.

Warring Assets

Rising anxiety over protectionism has created surging stock correlations. But the relative calm in fixed income and FX has perplexed analysts over the past few weeks.

It seems only equity is reacting to political uncertainty, as the asset class that directly influences the terms of trade between nations — currencies — isn’t sounding any alarms.

Meanwhile, two-year interest-rate correlations have fallen to the lowest since at least 2002, data compiled by HSBC show. For the past six months, front-end swaps among a basket of large developed and emerging countries have charted increasingly independent paths, driven by diverging monetary policy, according to the bank.

Stressed Stocks

Not all stock volatility is created equal. For the first time in nearly two years, price swings among developed-market stocks are greater than emerging-market counterparts. Typically, the latter group is seen as more risky with higher volatility to boot.

That raises the question of how assets will shift back to their historical norms — will calm return to developed markets, or will a storm gather in developing nations?

Conscious Uncoupling

Differences in volatility aren’t just cropping up between regions. Cyclical stock sectors are also behaving in unexpected ways.

Take energy and technology. Commodity shares tend to be more reactive to fundamental shifts given the signals they contain about the economic outlook. But even as oil-price volatility jumped on escalating tensions in the Middle East, it wasn’t enough to overtake tech share swings.

One-month historical volatility for tech stocks has climbed to the highest level compared to that of energy shares in a decade, data compiled by Bloomberg show.

Conflicting Trades

For those attempting to navigate the path of rate normalization and economic expansion, trading over the past month has only muddied the narrative. Judging by declines in some growth-sensitive assets across equities and commodities, disappointing data have shaken investor confidence in the synchronized global story.

Yet a clear bid emerged for securities that protect against inflation. In March, the iShares TIPS ETF posted its best month since August 2017 as its realized volatility barely budged, notes HSBC.

And then there’s the vexing question of the trade-weighted dollar, which has failed to catch a lucky break despite the recent flight to safety and some disappointing European economic data. What’s more, as the copper-gold ratio has weakened — indicating risk-adverse trading — so too has the greenback. The sudden change in behavior reflects the multiple conflicting forces driving the currency, according to analysts.

“Right now, it doesn’t make sense that the dollar has generally been weak, despite the Fed raising rates and the recent improvement in U.S. economic data relative to the rest of the world,” Evercore ISI’s Dennis DeBusschere wrote in a note.

Amid the stock volatility, perhaps the smart money in interest-rate markets and currencies is banking on monetary-policy continuity and sustained economic output. But the case for bulls isn’t straightforward.

“The market is sitting and asking: What is the upside story to the business cycle?,” said Rafiki’s Englander. “It’s harder to tell the positive one — productivity is going to pick up, inflation isn’t going to be that high and the business cycle isn’t going to end anytime soon.”

New Zealand may have just killed its oil industry

12 Apr 18
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New York City wants oil companies to pay for climate change

Prime Minister Jacinda Ardern announced Thursday that the government will “no longer be granting any new offshore oil and gas exploration permits.”

“This is another step on our transition away from fossil fuels and towards a carbon neutral economy,” Ardern said in a speech.

The country’s oil industry quickly voiced its anger over the move.

“The decision is a lose-lose for New Zealand’s economy and environment, likely to threaten jobs and mean higher prices for consumers,” said Cameron Madgwick, CEO of the Petroleum Exploration and Production Association of New Zealand.

“Because petroleum is produced to meet growing global demand, not exploring and producing in New Zealand simply means other countries will produce it instead and we will have to import it at higher cost,” he said.

Related: Norway’s $1 trillion pension fund wants out of oil stocks

Madgwick said that “huge investments have been made by companies already anticipating offshore block offers, which have now gone to waste and people’s jobs will be affected.” The association said the oil and gas industry employs more than 11,000 people “at peak times.”

The government said that the oil industry should instead use its expertise in more environmentally and economically sustainable areas, such as mining materials for solar panels.

Angus Rodger, a research director at consultancy Wood Mackenzie, said New Zealand’s move was “a bold step.”

The country was sending a clear message that it was prepared to leave oil and gas production behind, and the tax revenues and jobs that go with it, he added.

“Industry interest in New Zealand oil and gas is actually higher now than it has been for a number of years,” Rodger said, pointing to recent investments by companies such as Austria’s OMV Group (OMVKY) and Malaysia’s Sapura Energy. It’s unclear how they and others will interpret the government’s announcement, he added.

The prime minister made clear that the government would honor existing offshore exploration permits.

 CNNMoney (Hong Kong)

Chinese A.I. start-up raises a record $600 million in funding round led by Alibaba

09 Apr 18
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  • China’s SenseTime said Monday that it had broken the record for the largest venture capital investment in the AI industry.
  • The firm provides facial-recognition technology that can be used for things like bank card verification.
  • Qualcomm backed SenseTime in a funding round last year, although the size of the investment has not been disclosed.

China’s SenseTime has raised $600 million in a round of funding led by e-commerce giant Alibaba.

The company said Monday that it had broken the record for the largest venture capital investment in the artificial intelligence (AI) industry.

Alibaba founder Jack Ma waits on the floor at the New York Stock Exchange in New York on September 19, 2014.

Jewel Samad | AFP | Getty Images
Alibaba founder Jack Ma waits on the floor at the New York Stock Exchange in New York on September 19, 2014.

SenseTime is a little-known AI firm with a valuation reportedly higher than $3 billion. The firm provides facial-recognition technology that can be used for things like bank card verification and counts state-owned telecommunications giant China Mobile, phone maker Huawei and U.S. chipmaker Nvidia among its clients.

The latest round of investment followed a $410 million capital injection SenseTime received in July last year. Its Series C round, the third stage of funding for a company, was also backed by Chinese retailer and Singaporean state wealth fund Temasek.

SenseTime has partnered with Honda on autonomous driving and Qualcomm on algorithms and smart technology. Qualcomm has alsobacked SenseTime in a funding round last year, although the size of the investment has not been disclosed.

SenseTime said it will use the raised capital to expand its AI platform, advance its technological innovation and open up new business opportunities.

Xiaoou Tang, co-founder of SenseTime, and Joe Tsai, co-vice chairman of Alibaba, at the Jumpstarter start-up pitch event in Hong Kong on November 21, 2017.

Vivek Prakash | Bloomberg via Getty Images
Xiaoou Tang, co-founder of SenseTime, and Joe Tsai, co-vice chairman of Alibaba, at the Jumpstarter start-up pitch event in Hong Kong on November 21, 2017.

“SenseTime has established an AI ecosystem anchored with robust research, deep industry collaboration and diverse partnerships,” Li Xu, SenseTime’s chief executive, said in a statement Monday.

“Our Round C funding will maximize these advantages by accelerating the development of a global footprint with a larger ecosystem incorporating both domestic and overseas partners. The funding will also help us widen the scope for more industrial application of AI, thus increasing the value of SenseTime’s global ecosystem.”

China’s government has said it wants to make the country the world leader in AI by 2030, by boosting the value of the sector to 1 trillion yuan ($147.7 billion). In January, it said it would build a state-backed $2.1 billion AI research and development campus to house around 400 tech businesses.

Correction: This article has been updated to reflect that SenseTime has a valuation reportedly higher than $3 billion.