17 Aug 18

Juan Palenzuela

17 Aug 18

Good morning, 

The prospect of a full-blown trade war between China and the US has been tormenting investors and policymakers around the world since the Trump administration first announced tariffs on steel imports in April last year.

However, there is one new reason for hope: the Chinese state-run Xinhua News reported yesterday that the country will re-establish official trade negotiations after talks broke down in June. "It is a good thing if they're sending a delegation here. We haven't had that in quite some time" Larry Kudlow, Director of the Economic Council, told CNBC. The American markets also greeted the move warmly, opening strongly on Thursday (See Marketssection).
 
Some observers, however, question the potential of the talks. The visit will be made by the Vice Minister of Commerce – a low level official – and it will take place at the end of the month, right when a new set of American tariffs on Chinese goods will come into force: China is expected to reciprocate.
 
Yet the meeting is an unusual sign of de-escalation that perhaps shows that the two countries would rather avoid a trade war. And so they should. A full-blown trade war is almost certain to damage global growth. The Economist Intelligence Unit forecasts that it could slow from 3% in 2017 to 2.4% in 2020, and American growth would lower from 2.8% in 2018 to 1.3% in 2020 as a consequence of the trade dispute.
 
Even if the two countries seem willing to drag out the fight for now, the dispute is unlikely to last over the long term. The negative economic impact will be felt in America by the end of the 2018, and to add to the pressure, Democrats are in a strong position to win the majority of the House of Representatives in the Midterm elections next November. This could force the Trump administration to rethink its trade strategy and abstain from further escalations.

News 

Official figures released yesterday show a 31% drop in the number of apprenticeships over the past year in the UK. The drop thwarts the government’s efforts to create 3 million apprenticeships by 2020. Business leaders are calling for a reconsideration of the current apprenticeship levy, demanding instead for more flexible policies that allows companies to spend the money on a broader range of training.
 
The diplomatic standoff between Turkey and the US continues to grow as Steve Mnuchin, the Treasury Secretary, announced that Washington had prepared further measures against Ankara.  Although the Lira gained some momentum yesterday, product of a $15bn Qatari investment pledge, it is likely to tumble again over the next days as the impasse continues. America is pushing for the release of Andrew Brunson, an evangelical pastor arrested in 2016 over espionage charges. (£)

Egypt is said to be finishing off the details of a truce deal between Israel and Hamas in the Gaza Strip, an Egyptian security source told Reuters yesterday.Any agreement will need the consent of Fatah, the party which commands the Palestinian National Authority, which maintains a vast presence in the Hamas-controlled Gaza strip.

Business & Economy 

Walmart released Q2 results yesterday, unveiling its strongest US sales growth in more than a decade, a result of increasing traffic to its websites and stores. The result, which excited investors and sent Walmart shares up by almost 10%, established the company as one of this year’s winners from a US economy characterised by low unemployment and robust consumer spending.
 
Amazon is said to be reaching out to some European insurance firms to see if they would contribute with their products to a UK insurance price comparison website, as reported by Thomson Reuters. This would be a major incursion of the tech giant into financial services. It is unclear what kind of insurance products would be offered, and there is no official statement from Amazon regarding the idea yet.

Applied Materials, the world’s largest chip manufacturing equipment supplier, reported a 19.3% rise in quarterly revenue yesterday as chipmakers boosted spending to meet an increasing rising demand for memory from smartphone makers. Nonetheless, the results were below expectations as revenue failed to grow. (£)

Markets 

What happened yesterday?
The announcement of the restoration of trade talks between China and the US has lifted markets across the globe. The FTSE 100 increased by 0.78% or to 7,556.38. Meanwhile, the Dow Jones Industrial average rose 1.34% to 25,558.73, the S&P 500 gained 0.77% or to 2,839.99 and the Nasdaq went up by 0.78% to 7,835.12.
 
According to figures released by the Office for National Statistics yesterday, retail sales grew 0.7% in July compared to 0.5% in June, matching expectations for a 0.2% increase. These good results can also account for the strong market performance in the UK yesterday.
 
Companies most affected by the volatility of the trade war benefited the most from the Chinese announcement: shares in Boeing, which is China’s biggest airplane manufacturer, rose by almost two percentage points from $337.71 to $344; while stocks in ZTE, a Chinese phone manufacturer, rose by more than 8%.
 
On the currency markets, sterling increased against the dollar to 1.2716, still less than the peak from earlier in the week; and 0.17% lower versus the euro at 1.1173.

Interims
Global Ports Holding

AGMs
MX Oil

EGMs
Brack Capital Real Estate Investments N.V.
PJSC Megafon GDR

Annual Report
Abbey

UK Economic Announcements
(09:00) Current Account (EU)
 
Intl. Economic Announcements
(07:00) Wholesale Price Index (GER)
(09:00) Current Account (EU)
(10:00) Consumer Price Index (EU)

Columns of Note 

In the Financial Times, David Pilling examines the population explosion Sub-Saharan Africa is set to experience in the coming years and explores the extent to which population growth alone can lead to economic growth. Unlike population figures in Asia and the West, which have begun to stall, Africa is posed to account for most of the world’s population growth in the coming years. If the new people manage to find jobs, Africa should also account for most of global growth. But this is a misleading assumption: if population growth naturally led to rising living standards then Africa would already be a mid-income region, but it is in fact far from that. The key for economic growth is a low dependency ratio, Pilling believes, which measures the share of people that are not in the labour force; and a low fertility rate, which allow people to focus on their productiveness. Instead of forcibly bringing population figures down, however, African policymakers should focus on improving health and education systems, empowering woman and raising awareness.
 
Writing for The Telegraph, Daisy Buchanan defends University education. She stresses societal needs for doctors, engineers and teachers – all of which must go through university. Contrary to what some public figures say, Buchanan argues, University indeed inculcates key factors for a successful life. Instead of deterring students from pursuing higher education, Buchanan thinks that we should promote them. “When we discourage people from going to University, we’re telling them that we don’t care about their future” she argues.

Did you know? 

If you consider any naturally occurring measurement – the height of a mountain, the population of a country or the price of a stock – the number is 30% likely to begin with a 1, and less than 5% likely to begin with 9. This phenomenon is known as Benford’s Law, and it is used in applications such as forensic accounting and audit for fraud detection.
 

Parliamentary highlights 

House of Commons
In recess until 4 September 2018
 
House of Lords
In recess until 4 September 2018
 
Scottish Parliament
In recess until 4 September 2018