International News (Issue 390) – 11 March 2016

The ECB decision on Thursday night is clearly the big macro news of the week and since I endeavoured to articulate much of the policy news in the comments above, I won’t repeat myself here.

I will however posit an additional observation that many commentators are now making in relation to the negative interest rates seen across Europe and Japan, is that these policies are making it more and more difficult for the national banking systems in these regions to operate with sufficient profitability.

Think about it.

Not only are banks being squeezed by the need to hold greater equity to protect themselves against loss, but they are now rapidly having their business model usurped by free cash and the collapsing spreads available on lending money.

This is becoming a big deal.

What’s also a potentially HUGE DEAL internationally this week, is the decision by the US Commerce Department to BAN THE EXPORT OF ANY US MADE EQUIPMENT TO CHINA’S SECOND LARGEST TELECOM EQUIPMENT COMPANY ZTE.

Not only that, the ban precludes any foreign manufacturer from selling to ZTE if their product includes US made componentry.

ZTE is the second largest Chinese telecom player behind Huawei and is the 4th largest mobile handset seller by volume in the US.

Since ZTE sources around 40% of its components from the US alone, this decision smashes ZTE as a business over the head with an awful big shovel.

This could have huge implications for global trade relations and could be seen as the first emerging signs of a trade war between the US and China.

The significance of this decision is enormous.

(Many thanks to Neil Campling at Aviate Global in London for these thoughts).

Outside of the ECB and ZTE, we saw an update of China’s monthly foreign exchange reserves and the outflow of cash seemed to slow during February.

That’s encouraging.

Chinese inflation figures were also released and created little impact.

Lastly in China, the PBOC announced plans to allow Chinese banks the ability to swap non-performing debt for equity, a mild positive in the sense that it gives the banks there some greater flexibility in dealing with problem loans.

On the flipside, its palliative care and doesn’t solve the bigger issue of the non-performing loans!

Next Thursday the US Federal Reserve meet in what will be a crucial catalyst for markets but one which I frankly find impossible to call.

Either way, with increasing trade tensions and central banks globally facing a more difficult task at stimulating growth, we remain cautious as to the sustainability of this recent rally in risk assets.

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