Julius Baer: disputas comerciales, bonos gubernamentales Europa, Turquía

Redacción - Miercoles, 11 de Julio

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Trade disputes: Tit-for-tat and some further tat The US’ reaction to China’s retaliation against its import tariffs did not take long. Yesterday evening, President Trump announced tariffs of 10% on another USD 200 billion of Chinese imports, which could be introduced by the end of August at the earliest. While increasing uncertainty and weighing on sentiment in the financial markets – equities and commodities are heavily down this morning – we still see a limited impact on global growth. President Trump is not willing to compromise due to his perception of a position of strength. Hence, we increased the probability of a trade war to 25%, which is significant. While the US are hardening their stance on China, they seemingly softened it on Iran. Largely unnoticed due to the trade dispute headlines, US secretary of state Pompeo said that oil sanctions waivers could generally be granted. While no details were specified, this might still signal that the Trump administration is not unaware of the potential economic consequences of its policies, e.g. causing significant fuel inflation that would initially weigh on consumer and business sentiment but ultimately on the economy. The near-term outlook for oil remains clouded in high uncertainty with difficult to predict political factors at play, confirming our neutral view. Yet, there is no meaningful upside to prices unless the market has to go without Iranian and much less Venezuelan oil.

President Trump announced more tariffs on Chinese imports. While increasing uncertainty and weighing on sentiment in the financial markets, we still see a limited impact on global growth. Meanwhile, the US seemingly softened their stance on Iran, saying oil sanction waivers could be granted. With difficult to predict political factors at play, we remain neutral on oil.

 

Carsten Menke, Commodity Research, Julius Baer

 

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European government bonds: More defence spending in the pipeline?

 

The financial markets still struggle to come to terms with a US President who sticks to his campaign pledges. Donald Trump delivers on deregulation, tax reform and infrastructure spending, whereby the latter is often overseen by European observers. The market focus currently rests on trade, where Donald Trump has promised to balance the account with China. The latest round of import tariffs announced yesterday will not come into force before September, giving the market some last room for hope that a compromise can be found. Our focus today lies on the NATO summit. Donald Trump has promised the American taxpayers to make Europe pay more for its own defence. The official target is 2% of gross domestic product, but most European countries spend way below. According to the NATO report published two weeks ago, Germany, Belgium, France and the Netherlands are spending the equivalent of roughly 1%, i.e. half the NATO guideline. France is closer, Portugal at the guideline whereas Greece overfulfils. It will be interesting to see whether Donald Trump is influential enough to make the Europeans spend more for their defence.

 

It is an open secret that the policy mix in Europe is suboptimal, to say the least, with the emphasis on monetary policy while fiscal policy is restrictive. A push for more defence spending would go in the right direction. Any such fiscal initiative, however, would be negative for European government bonds for two reasons. First, it will lead to more supply, and second, it allows the European Central Bank to normalise its monetary policy earlier. We stay negative for core European government bonds. For investors looking for exposure to safe EUR investments, we have initiated a new idea to invest exclusively in European inflation-linked bonds, which benefit from higher oil prices. 

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

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Turkey: Nepotism for tighter control over economic and monetary policy

 

President Erdogan has taken his oath as executive president and appointed his cabinet. The most prominent appointment is the one of his son-in-law Berat Albayrak as Treasury and Finance Minister replacing Mr Simsek and Mr Agbal, who are more investor-friendly but have been completely removed from the new cabinet. President Erdogan has wasted no time in exercising his consolidated power and has issued a decree removing the clause saying that central bank governors are appointed for five years by cabinet decision, thus allowing him to appoint the central bank governor directly. Even though it is still not clear whether the new rules will affect current governor Cetinkaya whose mandate ends in 2021, there is little expectation that the central bank will remain independent or that they will hike rates to stop the overheating of the Turkish economy at their next meeting on 24 July. Erdogan is an opponent of higher interest rates and is unwilling to implement the necessary structural reforms in Turkey, even though inflation of ca 15% remains at a 15-year high and above the central bank’s 5% target.

 

Turkey’s 10-year government local-currency bond has reached a record high yield of 17%. We don’t expect the central bank to hike rates at its next meeting on 24 July.

 

Eirini Tsekeridou, Fixed Income Analyst, Julius Baer

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