China threatens "forceful" measures if U.S. escalates trade war
Chinese Foreign Ministry spokeswoman Hua Chunying said on Wednesday that China will respond with "resolute and forceful" measures if the U.S. continues to act in an "arbitrary and reckless manner" on trade, CNBC reports.
The backdrop: In a reversal from the trade war truce that had seemingly been reached days earlier, the White House announced on Tuesday that it will impose a 25% tariff on $50 billion worth of Chinese tech goods. That followed criticism that the Trump administration had backed down without getting concrete concessions from China. Commerce Secretary Wilbur Ross is visiting Beijing over the weekend "to try and get China to agree to firm numbers to buy more U.S. goods," per CNBC.
Michael Kors 4QF18 first take: EPS again delivers upside, but FY19 outlook appears conservative - TAG (68.22)
TAG notes KORS reported better than expected EPS results for the fiscal fourth quarter (though not to the magnitude of recent reports), but FY19 guidance is a bit short of consensus expectations. KORS's strong momentum has stalled so far this year, and the conservative guidance provided today may continue that pattern over the near term, in their view. While reported comps for the quarter were positive (against a very easy compare), they did decrease 1.7% in constant currency. In addition, the guidance for flat comps for the first quarter and for all of FY19 may come as a disappointment as well as the company begins to lap its steep pullback in promotional activity in the retail channel. The results continue to show progress on its initiatives to improve AUR and gross margin, while upside to conservative operating expense ratio guidance has contributed to earnings beats over the last several quarters. They see the ongoing rationalization across the space as healthy for the group in general, with improved profitability potential in the handbag space overall as the result; Market Perform.
KORS down 4% premarket; call at 8:30
U.S. Tariff Threat Could Scuttle Planned Trade Talks With China
Surprise White House declaration endangers scheduled weekend negotiations, emboldens Chinese hard-liners
BEIJING—The White House’s renewed trade offensive against China is putting this weekend’s planned settlement talks at risk, as well as fueling nationalistic calls for China to take a tougher stance against U.S. demands.
A U.S. advance team landed in Beijing Wednesday to prepare for Commerce Secretary Wilbur Ross’s arrival Saturday, according to people with knowledge of the matter from both governments. But they say the surprise U.S. decision a day earlier to move forward with tariffs against China—less than two weeks after both sides declared a truce—is casting doubt over whether those talks can advance to the next level.
“This risks disrupting the negotiations,” one of the people said.
If the two sides’ teams fail to agree on the issues to be discussed, Mr. Ross’s trip could be canceled, according to the people. If they succeed, however, the high-level talks would proceed as planned, they said.
For its part, China is looking to line up other countries, especially in Europe and Asia, against the U.S., Chinese officials say. Their companies could benefit from China’s plans to allow foreign companies better access to its markets. The State Council, China’s cabinet, said late Wednesday it had decided to lower tariffs on imported washing machines, cosmetics and other consumer goods, starting July 1.
The council also said that by the same date it would complete a “negative list” specifying areas closed to foreign investors, so opening more sectors. The U.S. and other countries have asked China to fundamentally change how it approves foreign investment. Currently it responds to specific applications, but Western nations have urged a negative-list approach that opens the economy to investment apart from certain restricted sectors such as defense.
RELATED
U.S. Moves Ahead on China Trade Curbs, Catching Beijing Off Guard (May 29)
As Trump Talks Tough on Trade, Worries Mount Over Lack of Action (May 28)
Treasury Secretary Says U.S., China Have Suspended Tariffs (May 21)
Beijing has been bracing for lengthy sparring with Washington over trade and other economic issues, but the truce called by both sides—led by U.S. Treasury Secretary Steven Mnuchin and China’s economic chief Liu He —had raised hopes for a near-term settlement giving the world’s two biggest economies a way forward.
Then on Tuesday, the Trump administration said that by June 15 it would release a final list of $50 billion in imports from China that would be subject to tariffs of 25%, to be applied soon after. It also said it planned by June 30 to announce investment restrictions meant to prevent Chinese acquisition of U.S. technology.
This startled Chinese officials working to ease the trade tensions—and emboldened hard-liners within China who advocate fighting fire with fire.
Mei Xinyu, an analyst at a think-tank affiliated with China’s Commerce Ministry, called for hitting back with tariffs on soybeans, sorghum and other products from the Farm Belt states, a stronghold of support for President Donald Trump.
“Since the U.S. side can talk about imposing tariffs again, we can also put forward our previously published retaliation lists,” Mr. Mei wrote in an article posted on a popular social-media account run by the official People’s Daily.
‘Trump overplayed this ‘unpredictability’ strategy.’
—Mei Xinyu, an analyst at a think-tank affiliated with China’s Commerce Ministry
In response to questions from The Wall Street Journal, Mr. Mei said he believes Mr. Trump announced the tariffs as a negotiating tactic but that the China side can see through the ploy. “Trump overplayed this ‘unpredictability’ strategy,” Mr. Mei said.
China’s Foreign Ministry sounded a similar note. “Every flip-flop and U-turn is simply depleting and squandering [U.S.] credibility,” Foreign Ministry spokeswoman Hua Chunying said at a briefing Wednesday. “China is committed to properly resolving relevant trade issues through equal dialogue.”
China’s chief trade negotiator, Mr. Liu—who has had the blessing of President Xi Jinping in fending off a trade battle with the U.S.—has used the U.S. pressure to accelerate plans to liberalize financial markets, the auto sector and other industries. A prolonged dispute could embolden interest groups with a stake in the status quo, including China’s vast state sector, potentially derailing Mr. Liu’s efforts to open the Chinese economy.
“He’s under tremendous pressure domestically,” a Beijing-based government adviser said.
Mr. Ross is scheduled to lead an interagency team trying to secure a deal by which China would buy more U.S. farm and energy products. In negotiations in Washington this month, a Chinese team led by Mr. Liu agreed to work with their U.S. counterparts on narrowing the trade gap, though it didn’t commit to any numerical targets.
The latest twist also leaves hanging in the balance the fate of two companies that have come to symbolize the U.S.-China trade intrigue: Chinese telecommunications equipment giant ZTE Corp., and U.S. chip maker Qualcomm Inc.
lawmakers, and the two sides have agreed to a broad outline of a deal. Mr. Ross was expected to discuss those terms in Beijing. As for Qualcomm, its planned $44 billion acquisition of Netherlands-based NXP Semiconductors NV still awaits Chinese approval, though authorities signaled this past weekend that it was imminent.
Since the Washington talks, Chinese officials have suggested they’re willing to lower tariffs on a variety of U.S. agricultural products, which some U.S. officials said could double U.S. farm exports to China within a year. They totaled about $20 billion last year. Now, with the renewed tariff threats from the U.S., it is far from certain how those talks would proceed.
Lester Ross, a lawyer who heads the policy committee of the American Chamber of Commerce in China, said Tuesday’s announcement from Washington, while surprising, is another in a series of moves and countermoves.
“It is fundamentally a negotiating step,” Mr. Ross—unrelated to Wilbur Ross—said at a news conference where the Chamber released an annual report on U.S. businesses in China.
Many U.S. companies say they don’t view the trade imbalance as their biggest problem in China. In an annual report released Wednesday, the American Chamber of Commerce in China cited a lack of consistency in policy implementation and interpretation and a lack of clarity in laws and enforcement.
The group urged the Chinese government to create a level playing field for U.S. companies by allowing greater market access in China and to make regulations fairer and more transparent.
Who’s Most Vulnerable to Italy’s Troubles? Europe’s Banks
Political turmoil highlights how region’s banking system isn’t fully fixed from past crises
European bank executives are facing the return of an all too familiar problem: political panic.
After years of slowly healing from past crises, European banks have recently had the luxury of turning their focus to boosting profit and shedding bad loans. But the political turmoil in Italy—home to arguably Europe’s most problematic banking sector—has rekindled fears that the euro’s fragility, and authorities’ failure to unify the region’s disparate banking system, will continue to haunt the industry.
As the political temperature rises in Rome, and to a lesser extent in Madrid, European banks have taken the brunt of the pain.
The Euro Stoxx Banks index is down 5% this week following Italian President Sergio Mattarella’s move to block the formation of an antiestablishment government. A coming vote in Spain that could depose its pro-market center-right party from power has also rattled investors.
“The whole banking sector was under attack,” said Vincenzo Longo, a strategist at IG Markets.
If it continues, the uncertainty could delay widely anticipated interest rate rises in Europe, a move that would crimp bank profits. It could also hamper a closely watched cleanup operation at Italian lenders, analysts said.
Italian banks have been at the heart of the selloff. The country’s chronically unprofitable lenders have been steadily wading through deep restructuring and shedding bad loans. Fragile investor confidence in the turnaround has been dented by the latest political upheaval.
The negative sentiment also hit French and Spanish banks, which have sizable exposures to Italian government debt. In Portugal—which like Italy has a huge government debt pile—shares of Banco Comercial Português SA, the country’s largest traded bank, were down 12% this week.
European bank share prices stabilized in early trade Wednesday but the hit to investor confidence in the sector was palpable.
This latest instability comes as the European banking sector continues to lick its wounds from the continent’s last debt crisis.
A huge balance sheet clean up remains unfinished, with €813 billion ($938.3 billion) of bad loans—a large chunk of which is in Italy—still sitting on bank balance sheets, according to the European Banking Authority. Meanwhile, reforms aimed at decoupling the “doom loop” in which banks laden with their local government’s debt are sucked into a downward spiral as their home economy deteriorates remain unfinished.
“Whatever is bad for the Italian economy is going to be bad for its banks,” said Sony Kapoor, managing director of think tank Re-Define. “That aspect of the loop you simply cannot break.”
But the political turmoil reminds investors that European banks aren’t going to be making outsize profits soon.
Up until the turn of the year investors had predicted that the combination of an economic rebound, banking reforms pushed through by the European Central Bank and rising interest rates would see European bank profits rise to €120 billion this year, says George Karamanos, an analyst at Keefe, Bruyette & Woods. “Are those expectations realistic now?” he asks, adding it is unlikely.
That optimism was particularly visible in Italy. Up until a few months ago Italian banks were the best performing bank stocks in Europe. Political risk was seen as low and investors were cheering on a reduction in bad loans, which had shrunk to €285 billion from €350 billion in the space of a year. Politics has now dampened that optimism.
In Italy, two antiestablishment parties, whose attempt to form a coalition government failed last Sunday, had struck an agreement on a joint government platform, which included a number of measures for the banking sector.
The two parties planned to scrap a rule allowing banks to recover debts from retail borrowers without going through the courts, which could slow down the cleanup of banks’ balance sheets. They also hinted at the possible full nationalization of Banca Monte dei Paschi di Siena SpA, of which the government owns a majority stake after partially nationalizing it last year.
While their coalition attempt collapsed, they could come back stronger if new elections are called. Talks in Italy continue on how to overcome the political impasse.
That has raised questions over the future of the eurozone—both parties have flirted openly with the idea of pulling Italy out of the euro—and in turn spooked investors and highlighted a wider problem: EU authorities haven’t yet fully fixed the continent’s banking system.
A plan to package eurozone sovereign bonds together to reduce the riskiness of any individual bond within the pool, for example, has been largely shunned by Germany. The German government and other member states whose banks weren’t as hard-hit by the crisis, have also resisted the creation of an EU-wide deposit-insurance program, which would provide safety for depositors no matter their location. A Germany bank official said last week that EU-wide insurance program “probably won’t happen in my lifetime.”
During the last eurozone crisis banks across Europe shed sovereign exposures to riskier periphery markets. However, domestic banks in those countries still have large exposure to their home sovereign debt, particularly as they are treated as safe assets under bank accounting rules. Currently 10 Italian banks have Italian sovereign debt holdings greater than their capital buffers, according to a study by France’s IESEG School of Management.
After Italian banks, French banks are the second most exposed to Italian government debt with €44.27 billion in bonds, followed by Spain with €28 billion of sovereign debt, according to calculations by the EBA. France’s BNP Paribas SA, which has a large Italian bank, and Spain’s Banco de Sabadell SA are among the most exposed to Italy, analysts say.
However, some analysts have played down the risk of another full blown eurozone crisis engulfing the region’s banks.
“We do not expect a disorderly escalation of the situation into a repeat of the sovereign debt crisis,” analysts at UBS wrote in a recent note. Unlike years ago, the eurozone’s economy is growing and the ECB is still buying government and company bonds.
“We aren’t getting any panicked calls,” said one banker at a big European lender. European banks have largely already tapped markets to raise their funding for the year, so the latest upheaval isn’t hitting balance sheets yet.
Some investors are even eyeing deals again in Europe, said one major portfolio manager. “It’s starting to look cheap again,” he says.
EU plans €30bn fund to help crisis-hit eurozone countries
Loan scheme for single currency members hit by economic shock less ambitious than Macron’s proposa
Brussels is to propose a €30bn loan plan for countries hit by economic shocks, as it responds to French calls for a eurozone crisis-fighting budget.
The European Investment Stabilisation Function is far less ambitious than ideas put forward by French president Emmanuel Macron, who last year called for a fund amounting to several percentage points of eurozone gross domestic product.
But the European Commission will argue that its plan to be presented on Thursday is a “first step”, saying differences among eurozone governments and EU budgetary restraints prevent more ambitious proposals at this stage.
The commission’s plans, seen by the Financial Times, would allow it to borrow on capital markets to lend to countries facing one-off problems such as a natural disaster or a localised banking crisis. Countries could borrow to invest in infrastructure and other programmes to cushion an economic blow.
Interest on loans made to governments would be covered by a share of the profits that national central banks in the eurozone earn from issuing banknotes — a demand that is likely to stoke tensions with fiercely independent institutions such as Germany’s Bundesbank.
Total loans would be limited to €30bn with no country allowed to receive more than 30 per cent of available lending capacity. The scheme would be open to eurozone countries and aspiring members in the European exchange rate mechanism.
The creation of more joint eurozone spending power is a core strand of a reform plan for the single currency area being pushed by Mr Macron ahead of a summit of EU leaders in June.
Brussels acknowledges that a full-blown eurozone budget would require “strong political will and consensus” that does not yet exist among EU governments. France and southern eurozone countries are facing resistance from northern capitals, which rule out the need for more common spending pots in favour of governments taking greater responsibility for their national spending.
“The recipe for a larger cake is not centralised bailout funds and printing more money, but structural reforms and sound budgets,” Mark Rutte, the Dutch prime minister, said in a speech in Berlin in March. Mr Rutte is one of the most vocal opponents of a eurozone budget
Aware of the political tension, Brussels’ proposal aims to strike a balance between objections from north and south. In a nod to German fears about underwriting poorer countries’ spending, the text stresses that the stabilisation mechanism will result in no “permanent transfers” between eurozone countries, while governments will only be eligible for support if they have met core EU budget rules for the preceding two years.
Eligibility would also be linked to rises in a country’s unemployment rate, which must be higher than a 15-year rolling average and 1 per cent higher than in the same quarter the previous year.
Brussels’ draft plan allows for future upgrades to the scheme, saying it “should be considered as a first step in the development over time of a fully fledged insurance mechanism to cater for macroeconomic stabilisation”. The plan would need approval from EU governments and the European Parliament, with the proposal for sharing out central bank profits requiring unanimous agreement from capitals.
The proposal is distinct from the eurozone’s existing bailout fund, the European Stability Mechanism, which has a €500bn lending capacity and can be tapped by countries that have lost the ability to borrow on capital markets.
The commission plan would leave a door open to the ESM playing a role in administering the stabilisation fund.
IDC says worldwide smartphone volumes will remain down in 2018 before returning to growth in 2019 and beyond
- IDC says smartphone shipments are forecast to drop 0.2% in 2018 to 1.462 billion units, which is down from 1.465 billion in 2017 and 1.469 billion in 2016. Looking further out, IDC expects the market is to grow roughly 3% annually from 2019 onwards with worldwide shipment volume reaching 1.654 billion in 2022 and a five year compound annual growth rate of 2.5%
Gapping down
In reaction to disappointing earnings/guidance:
- CHS -12.7%, DSW -5.6%, KORS -3.9%, DAKT -2.5%
Other news:
- TTOO -7.7% (announces 5.65 mln share offering)
- KORS -3.9% (ahead of earnings)
- OCN -1.6% (CFO Michael Bourque has made the decision to resign)
- CP -1.4% (conductors and locomotive engineers approve strike)
- GDS -1.3% (proposes to offer up to US$250 million in aggregate principal amount of convertible senior notes due 2025)
Analyst comments:
- AKS -2.5% (downgraded to Sell from Neutral at Goldman)
- AXTA -1.3% (downgraded to Neutral from Overweight at JP Morgan)
![]()