Wednesday, February 24, 2016

China Takes Center Stage as G-20 Meeting Looms

China Takes Center Stage as
G-20 Meeting Looms

Mike Larson | Tuesday, February 23, 2016 at 4:20 pm

Market Roundup
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10-YR Yield
1.75% (-0.02)
$1,225.90 (+$16.20)
$31.92 (-$1.47)

China is taking center stage … again. That’s because global policymakers are about to board their jets for Shanghai for a key Group of 20 summit of fiscal and monetary policymakers. The want – desperately — to see that Chinese officials have things under control. They want — desperately — to hear that China has no plans to further devalue its yuan currency to gain an edge in the global economy. And they want – desperately — to speak with a unified voice afterward, in order to calm global market jitters.
Or as a Brookings Institution expert told the Wall Street Journal:
“G-20 officials are crossing their fingers and hoping that China can stabilize expectations and prevent a panicky outflow of capital.”
Some economists and outside observers are going so far as to call for a Plaza Accord-style deal. That September 1985 deal, signed at the Plaza Hotel in New York City, involved the governments of France, West Germany, Japan, the U.S. and the U.K.
Officials gathering in Shanghai are hoping China can stabilize expectations and prevent a panicky outflow of capital.
They agreed to weaken the U.S. dollar in order to give a boost to the U.S. economy and reduce the current account deficit. This time around, a “Shanghai Accord” would involve some kind of multinational effort to stabilize currency and other markets. But it’s unclear in what manner it would do so, and the Chinese appear to be talking expectations of significant coordinated action.
Clearly, the market turmoil in January and early February spooked policymakers. I believe that helped spur OPEC and non-OPEC nations to at least try something to stabilize energy prices. It also helped spur talk of some kind of coordinated action to calm things down. Those two catalysts were key reasons for the stock market bounce.
But can policymakers actually deliver something that has a lasting impact? Or is this just a short-covering bounce based on unrealistic hopes, hopes that will soon be dashed in Shanghai?
“I don’t see what the G-20 can do … to change the current dynamic for more than a few hours or days.”
I’m leaning toward the latter camp because I don’t see what the G-20 can do or say to change the current dynamic for more than a few hours or days. That’s because different countries are pursuing different monetary policies right now, and they have different goals.
For example, why would the Europeans or Japanese agree to work with the U.S. to weaken the dollar when they’ve spent the better part of the last two years trying to weaken their own currencies? It doesn’t make any sense.
The Chinese also seem intent on pretending everything is going okay, and projecting an image of calm to the world. Freaking out and launching a significant devaluation, or enacting other drastic measures, would run counter to that strategy.
Bottom line? There’s a lot of hope being priced into assets ahead of this meeting. If policymakers deliver a “nothing burger,” that could ignite fresh turmoil in the markets. Stay tuned!
In the meantime, what do you think the G-20 will or won’t accomplish? Is there anything the Chinese can do to calm the markets again? What about the U.S., Europe, and Japan? What kinds of currency moves are you expecting to see next week in the wake of this summit? Are there other investment moves you’re making to get prepared? I want to hear about it below.
Our Readers Speak
Should the U.K. vote itself out of the European Union, or should it stay put? That was a question the markets were wrestling with yesterday, and several of you also weighed in with your thoughts.
Reader Donald L. said the EU is in serious trouble regardless of what the Brits do. His take: “The EU is the closest thing we will see to a real zombie. Its functions are kept moving, pretty erratically, only by the massive bureaucracy in Brussels. It oppresses with its rules and serves no one save the governments and their minions. An orderly departure would be best, but a departure for certain.”
Reader Anthony D. said: “An orderly departure is what l and many of my friends and business associates shall vote for. Then we will press for the revival and reformation of the EU as a European Free Trade Area, as an association of European nations, each with independent and very strict immigration control.
“As such, there will be no need for draconian Soviet-style multinational control, as presently exercised by the Brussels bureaucracy. It can be done away with, resulting in gigantic cost savings to big contributors like Germany and Great Britain. European security already covered nationally and internationally by NATO shall be strengthened as a European peacekeeping force.”
Reader Craig B. said he thinks the U.K. is cooking up a crisis in order to extract more concessions from Europe: “It’s a ploy for Prime Minister Cameron to negotiate more favorable terms from the EU, and then stay in the end. As with Scotland, Quebec, the Swiss vote to require the Swiss National Bank to own gold assets, and others, it’s only a protest that invariably comes up short each time of the required number of votes necessary to pass.
“Pundits have a field day for a while. But in the end, very little actually changes because the establishment always sells out the people in every country that votes for a proposed change.”
Speaking of Cameron, Reader Gordon offered this take on his latest European adventure: “It looks like David Cameron returned from his European trip with very few gifts in the bag. He is putting on a brave face and pushing his troops to sell the deal. Like most ‘deals,’ I am sure the average Brit will have trouble understanding its substance — much like me reading the fine print in my insurance policies.
“They will blindly place their trust in good old David and say ‘yes’ as he will have the most ground troops, momentum, and horn blowers out there stumping the country to try to sell this pig in a poke. One only needs to look at how NAFTA turned Canada and the U.S. into an industrial wasteland and the TPP will do the same.”
Finally, Reader Howard said: “If the EU was the great success it was forecast to be long ago then there would be no need for this referendum. The issues are many, but the loss of sovereignty and having to take orders while funding Brussels is of great concern.
“Having secure borders is an issue for any country wanting and believing in their rights of self-determination. Free travel between borders for Europeans is being abused, as are some governments who believe in a free ride on the coattails of the working few in more disciplined societies. Get out while the going is good.”
Thanks for sharing these very interesting takes on the latest political machinations in Europe. It’s clear to me that political infighting, out-of-control monetary policy, the migrant crisis, collapsing banks, and other problems have left the Continent in very rough shape – and that European markets are extremely vulnerable as a result. That, in turn, could lead to more market volatility and turmoil here in the U.S. So be sure to keep an eye on what’s going on across the pond (as I am).
Are there other points I didn’t touch on? Any thoughts you have that you didn’t share yet? Then use the comment section below to weigh in.
Other Developments of the Day
BulletStandard Chartered (SCBFF) of the U.K. became the latest European megabank to plunge after it reported its first full-year loss since 1989. Though based in London, the bank has significant operations in emerging markets around the world. Massive restructuring charges, losses on derivatives, goodwill impairments, provisions for bad loans, and other challenges drove its loss to $2.2 billion. That was a huge swing from a year-earlier profit of $2.7 billion.
BulletAuto lenders have been giving loans to anyone with a pulse lately. Now, subprime car borrowers are falling behind on their payments at the highest rates in years.
The delinquency rate on subprime loans that are bundled into so-called Asset Backed Securities (ABS), just hit 4.7%. That’s the highest rate since 2010. The actual default rate hit 12.3%, also the highest in six years.
None of this is good news for a banking industry that’s already facing a variety of financial threats. Who could have seen this coming? You did, as a reader of Money and Markets.
BulletWhile merger financing has gotten tighter in recent months, some companies are still exploring or conducting transactions. Western Digital (WDC) is going forward with its $15.8 billion offer for chipmaker SanDisk (SNDK) after a separate Chinese bidder dropped out amid fears of U.S. government scrutiny.
Aerospace giants Honeywell International (HON) and United Technologies (UTX) also explored a huge combination. But the talks have stalled because of expected antitrust opposition in the U.S. A merger would have created a company worth $70 billion that employed more than 300,000, per the Wall Street Journal.
Are you as “shocked” as I am to hear that people with bad credit are now defaulting at ever-increasing rates on their subprime auto loans? What do you think of the latest European megabank debacle? And how about the M&A business? Is it doomed? Or do these latest proposals suggest a revival is in the works? Let me know in the discussion section.
Until next time,
Mike Larson
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Mike Larson Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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