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Interactive Brokers - The Week Ahead (Mar 4-8), China Engages U.S. In Trade Talks & Corporate Bonds


Asia-Pacific: The Week Ahead (Mar 4-8)

China Engages U.S. In Trade Talks & Corporate Bonds

 

Activity on China’s economic calendar will be somewhat light in the week ahead, however investors will glean some important updates on the country’s services sector, trade balance figures, as well as consumer and producer prices.

Meanwhile, Chinese energy business developer Chongqing Energy Investment Group is due to sell new U.S. dollar-denominated bonds for general corporate and refinancing purposes.

Market participants’ attention in the Asia-Pacific region has been generally diverted recently to a slew of geopolitical concerns, especially as tensions have reignited between nuclear emboldened countries India and Pakistan, and as the leaders of the U.S. and North Korea meet in Vietnam.

 

 

Marc Chandler, chief market strategist at Bannockburn Global Forex, noted that the “euphoric response to the extension of the tariff-freeze between the U.S. and China” had not been sustained.

U.S. President Donald Trump reportedly said Sunday he will delay increasing tariffs on US$200bn worth of Chinese imported goods, amid progress in the trade talks between the two countries. The hike in those tariffs – to 25% from 10% -- was due to take effect March 1.

Chandler said that the market rally that followed Monday was “exaggerated,” with the CSI 300, having gone from a 6% gain to a 1.2% loss the next day. He added that the “dramatic rise spooked officials.”

 

Contributing to U.S. Dollar Corporate Debt Volumes

Meanwhile, some Chinese companies are taking advantage of the ultra-low interest rate landscape to sell new U.S. dollar-denominated corporate debt deals, notably while the Federal Reserve appears to have shifted gears to a more dovish stance on monetary policy.

Fed chair Jerome Powell Tuesday reinforced the Federal Open Market Committee’s (FOMC) decision in January to take a ‘patient’ approach with regard to future policy changes when testifying before the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs.

Among other global concerns, Powell said growth has “slowed in some major foreign economies, particularly China and Europe. And uncertainty is elevated around several unresolved government policy issues, including Brexit and ongoing trade negotiations.”

As Powell continues his two-day congressional testimony Wednesday, the yield on the 10-year U.S. Treasury note hovered at around 2.679%.

Against this backdrop, Chinese energy business developer Chongqing Energy Investment Group is due to sell new U.S. dollar-denominated bonds for general corporate and refinancing purposes.

Fitch Ratings said it expects to assign a ‘BBB’ credit rating to the notes, even though its standalone rating – notwithstanding its strong link to China’s Chongqing municipality – would be ‘B-.’

Chongqing Energy is the only municipal energy platform directly owned by the
Chongqing State-owned Assets Supervision and Administration Commission (SASAC).

Fitch analysts Zhihua Zhang and Penny Chen noted that the junk rating on the energy sector company is due to its weak financials.

The company's leverage was 13.7x in 2017 and its funds from operations (FFO) fixed-charge coverage was 1.3x. Capex has fallen since 2017 with the completion of major projects, and Chongqing SASAC is “now strictly controlling capex,” Fitch said.

Zhang and Chen said they expect a “modest negative free cash flow starting 2019 due to weak FFO generation, and leverage is likely to remain above 10.0x and coverage around 1.3x.”

Moreover, Fitch added that Chongqing Energy has “tight” liquidity, with around CNY25bn in short-term debt at end-September 2018, which cannot be fully serviced by its CNY1.8 billion of readily available cash.

Mark Your Calendars!

Investors in the week ahead will receive updates on the China’s services sector, trade balance figures, as well as consumer and producer prices.

 

Monday, March 4

  • Caixin Services PMI (Feb)

 

Chinese business expansion slowed at the start of 2019, with the Composite Output Index having fallen to 50.9 in January from 52.2 in the prior month.

However, the Caixin China General Services Business Activity Index declined only slightly to 53.6 in January from 53.9 in December. According to Caixin / IHS Markit, manufacturing companies signaled a “relatively subdued trend, with output declining modestly” at the start of 2019, with new orders up “slightly” in the latest survey period.

 

 

CEBM Group’s director of macroeconomic analysis Zhengsheng Zhong highlighted that demand for services remained “solid,” as the increase in new business accelerated “marginally.” However, weakening domestic demand weighed on China’s overall economic growth in January, despite slightly improved exports, as Sino-U.S. trade negotiations showed signs of progress.

Zhong added that the effects of China’s policies to support domestic demand and the development of the trade war between the country and the U.S. “will remain key to the prospects of the Chinese economy.

“Given that the government has refrained from taking policies of strong stimulus, the downward trend of the economy may be hard to turn around for the time being.”

Businesses in China were generally optimistic that activity will be higher than current levels in 12 months’ time.

 

Thursday, March 7

  • Trade Balance (Feb)

 

China's trade surplus ballooned to nearly US$39.2bn in January, more than 2x its December level of US$18.4bn, as a rise in exports far exceeded its imports.

 

Friday, March 8

  • CPI (Feb)
  • PPI (Feb)

 

Investors ahead of the weekend will also receive fresh inflation figures for February.

China’s consumer price index (CPI) climbed 1.7% year-on-year in January, with food costs up by 1.9 percent, consumer goods up 1.3%, and the prices of services up by 2.4%. On a month-over-month basis, consumer prices rose 0.5%, according to the National Bureau of Statistics of China.

 

 

Also, in January, the nation’s producer price index (PPI) for manufactured goods increased 0.1% year-on-year and fell 0.6% month-on-month. The purchasing price index for manufactured goods, which inched up 0.2% year-on-year, also decreased 0.9% from the previous month.

Market participants will also likely be eyeing progress on the global trade front, as well as cues about monetary policy from developed countries’ central banks, the price of crude oil, as well as developments around the UK’s plans to exit from the EU, the U.S.’s relationship with North Korea and any escalation of tensions between India and Pakistan, among other geopolitical risks, for any potential adverse impacts on China’s economic malaise.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

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The author does not hold any positions in the financial instruments referenced in the materials provided.

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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