The complex and evolving trade relationship between the United States and the European Union is at a pivotal moment, reflecting broader global shifts and geopolitical uncertainties. As two of the world’s largest economies, the U.S. and the EU have long maintained deep economic ties, characterized by significant trade in goods and services, as well as robust foreign direct investment. However, recent years have seen these dynamics challenged by global events such as the Covid-19 pandemic, Russia’s full-scale invasion of Ukraine and the rising influence of China.

The U.S. and Europe have long enjoyed strong economic ties through international trade, although in recent years the balance of trade has been tilted in Europe’s favor: In 2022, the U.S. imported goods and services worth $723 billion from the European Union. In return, the U.S. exported goods and services worth $592 billion to the EU, resulting in a U.S. trade deficit with the EU of about $131 billion. Total U.S. trade with Europe in goods and services was 73.4 percent larger than total U.S. trade with China. Nevertheless, the U.S. trade deficit with China was almost three times as large as the U.S. trade deficit with Europe.

That could change if former President Donald Trump gains reelection this November. His protectionist trade policies, which remain a key aspect of his campaign, will likely focus primarily on China, as was the case in his first term in office between 2017 and 2021. However, there is also a considerable degree of uncertainty around the question of what Mr. Trump’s reelection would imply for the U.S.-EU trade relationship. Over recent decades, no other two major regions in the world have shown stronger ties in terms of trade flows than the U.S. and the EU, but will this relationship endure?

President Trump has openly pondered the idea of introducing a 10 percent tariff on all imports from anywhere in the world – including the EU. Such a universal tariff would be of particular significance for Europe as the most important trading partner of the U.S. Although it is often argued that Mr. Trump advocates tariffs not for their own sake but merely as a threat to impel others to reduce trade barriers, this might just be wishful thinking from those who understand and appreciate the benefits of the international division of labor. 

Trade in goods

In 2020, China temporarily became, for the second time after 2010 and 2011, Europe’s largest trading partner when it comes specifically to goods, or tangible items that can be used, stored or consumed. When services are included – where the receiver does not obtain anything tangible through the transaction – the U.S. remained Europe’s biggest trading partner. If the U.S. imposes more restrictions, the trade relationship between Europe and China might be reinforced, continuing a trend observed over the past decades, during which total European trade in goods with China grew from less than 1 percent of gross domestic product (GDP) in 1999 to more than 5 percent in 2022.

European trade in goods with the U.S. initially declined between 1999 until the financial crisis hit in 2007. Since then, there has been a trend reversal: The EU-U.S. trade in goods as a total share of the EU’s GDP has been on the same trajectory as the EU-China trade in goods.

Europe has a sustained and increasing trade surplus with the U.S. when it comes to goods: While imports from the U.S. in 2023 were at about the same level as in 2000, exports as a share of GDP increased by more than 21 percent over the same period. In contrast, with China there is a sustained and increasing trade deficit. Both imports and exports have increased by a factor of more than five, and the deficit has grown from 0.3 percent of GDP in 1999 to 1.7 percent of GDP in 2023.

Trade in services

Trade in services remains dominated by the U.S. The U.S. holds a persistent and increasing trade surplus both with the EU and China. In absolute terms the trade in services is much stronger between the U.S. and the EU than between the U.S. and China, but the fall in service trade after 2019 is much stronger for the EU. In fact, in 2023 U.S.-EU trade in services as a percentage of U.S. GDP had not even returned to its level of 1999 – far less its pre-pandemic level.

It is precisely in services trade where we can observe, from the end of the first Trump administration to the end of the Biden administration, a decoupling between Europe and the U.S. relative to U.S. GDP. Given that the tie between Europe and the U.S. is also built on services, this development points to a tension in the U.S.-EU relationship with deeper causes than the prospect of Mr. Trump returning to the Oval Office. However, the tension might be exaggerated in the data presented here: In absolute terms, both imports and exports of services between the U.S. and the EU have come closer to pre-pandemic levels. It is only relative to U.S. GDP that a notable difference remains.

Foreign direct investment

The third main indicator of international trade and economic relationships is foreign direct investment (FDI). Slightly more than a quarter of the EU’s FDI outside the bloc is held in the U.S. This share, after some ups and downs, has increased only mildly over the past decade, by about 9 percent. EU foreign direct investment in China accounts for a much smaller share in overall EU external FDI, but has seen a sustained increase since 2017, rising by more than 26 percent in only five years.

There are nuances, however. When Hong Kong as a special economic zone is included, we observe a significant hike before the outbreak of the Covid-19 pandemic that subsequently vanishes. And while the overall trend remains positive, it is possible that the latest data for 2023 will show a trend reversal as a consequence of Western reactions to Russia’s full-scale war on Ukraine, and China’s friendly relationship to Russia.

Source: GIS

25bp or 50bp debate remains unresolved

US non-farm payrolls change including provisional downward revision line (000s)

Payrolls continue to soften, but remain positive

The unemployment rate has dipped back to 4.2%

Are we losing the "good jobs"?

Full time versus part time employment YoY%

With job weakness set to intensify we still hold onto a 50bp cut view

Source: ING

Contrary to wider belief, an analyst argues Ether has a slim chance of hitting new all-time highs by the end of 2024, as it has struggled to build a strong narrative and keep up with the appeal of tech stocks. 

However, several traders are adamant a price spike is just around the corner.

“Right now, Ethereum is struggling with a lack of a strong narrative to drive its price, especially compared to other assets,” crypto derivatives platform Derive founder and former Wall Street trader Nick Forster told Cointelegraph. 

Spot Ether ETFs returns not as lucrative for Wall Street

The launch of spot Ether (ETH) exchange-traded funds (ETF) on July 23 may have drawn more “Wall Street attention” to the asset, but its also put Ether in direct competition with more lucrative technology stocks that are “delivering better revenue and multiples,” Forster explained.

Since Jan. 1, the underlying asset Ethereum is up 0.98%, currently trading at $2,376, according to CoinMarketCap data. Meanwhile several leading tech stocks have seen far greater returns over the same period.

Ethereum printed a price of $2,282 on Jan. 1. Source: CoinMarketCap

Nvidia (NVDA) is up 122.57% trading at $107.21 and Meta Platforms (META) is up 49.26% trading at $516.86, according to Google Finance data.

He believes that “it's possible, but not highly likely” that Ether will break its current all-time high of $4,878 by the end of 2024.

“Options markets give it around a 10 percent chance,” he explained, noting that three major events “need to align” for it to happen.

These include Donald Trump winning the United States presidential election in November, the Federal Reserve making “aggressive rate cuts” to boost liquidity, and a “broader increase’ in global financial liquidity.

However, crypto trader Zen believes that a rate cut alone might not be enough. If it falls short of market expectations, it could lead to a bearish reaction.

“Be careful here. Feds cutting rates by 50 is a new rumor. Market is adjusting prices for that scenario. So 25 bps rate cut can become bearish news,” Zen wrote in a Sept. 4 X post.

US election may be a significant event for Ethereum

However, Forster claimed that the election alone could be the “most significant event” in Ethereum’s history, even more so than the approval of the ETF.

“There’s an extra bump of volatility implied around the election, with a potential 10-15% move on that day,” he added.

Forster pointed out that traders are expecting “more significant price swings” than what the asset has been printing in the near term.

“Generally, Ethereum has seen daily moves of around 2.5-3 percent, but the market is now pricing in daily moves closer to 3.5%,” he explained.

Meanwhile, pseudonymous crypto trader Titan of Crypto opined in an Sept. 5 X post that “an upward move seems just around the corner.”

They explained that when the Relative Strength Index (RSI) — measures the speed and change of price movements to identify overbought or oversold conditions — is “in or near oversold territory” on the three day chart, Ether “sees either a rally or a short-term pump.”

Fellow trader Yoddha added they are confident that Ether is “getting ready for five figures” despite the ongoing consolidation.

Source: COINTELEGRAPH

 Nippon Steel's proposed $14.9 billion takeover of U.S. Steel would create national security risks because it could hurt the supply of steel needed for critical transportation, construction and agriculture projects, the U.S. said in a letter sent to the companies and seen by Reuters.

The letter also cited a global glut of cheap Chinese steel, and said that under Nippon, a Japanese company, U.S. Steel would be less likely to seek tariffs on foreign steel importers.

The Committee on Foreign Investment in the U.S. (CFIUS) said in its 17-page letter sent on Saturday to Nippon Steel and U.S. Steel, and first reported by Reuters, that decisions by Nippon could "lead to a reduction in domestic steel production capacity."

CFIUS added: "While U.S. Steel frequently petitions for (trade) relief, Nippon Steel features prominently as a foreign respondent resisting trade relief for the U.S. domestic steel industry."

The letter provided a first glimpse of the national security grounds that the Biden administration could use as a basis for its expected move to block the merger, even as the companies and many industry experts questioned the strength of the arguments.

"By almost any measure, the issues identified by the committee are not ones that would fall into the national security bucket, but quite clearly into two others: Nationalistic trade protectionism and electoral politics," said Michael Leiter, a CFIUS lawyer in Washington, D.C. not involved in the deal.

If the government is "truly worried about maintaining steel supply here in the United States, the real solution is not to block this deal, but instead to use the CFIUS hammer to ensure that Nippon Steel makes and maintains such investments," he added.

The deal has become a political hot potato, with many Republican and Democratic lawmakers voicing opposition to it. Vice President and Democratic presidential candidate Kamala Harris said on Monday at a rally in Pennsylvania, the swing state where U.S. Steel is headquartered, that she wants U.S. Steel to remain "American owned and operated." Her Republican rival Donald Trump has pledged to block the deal if elected.

China looms large in the background of the trade concerns described by CFIUS. According to the committee, China's "persistent use of market-distorting government interventions" has allowed the country to unfairly gain dominance in the global steel market, as it exports extensive surplus steel that artificially lowers international prices.

It also cited 2022 data that showed China produced about 54% of total global crude steel and was the largest exporter.

In a 100-page response letter seen by Reuters and sent on Tuesday, Nippon Steel said it will invest billions of dollars to maintain and boost U.S. Steel facilities that otherwise would have been idled, "indisputably" allowing it to "maintain and potentially increase domestic steelmaking capacity in the United States."

Nippon also reaffirmed a promise not to transfer any U.S. Steel production capacity or jobs outside the U.S. and would not interfere in any of U.S. Steel's decisions on trade matters, including decisions to pursue trade measures under U.S. law against unfair trade practices.

The deal, Nippon added, would "create a stronger global competitor to China grounded in the close relationship between U.S. and Japan."

Nippon even proposed a national security agreement, aimed at assuaging CFIUS concerns, with pledges that a majority of U.S. Steel's board of directors would be non-dual U.S. citizens, including three independent directors approved by CFIUS to oversee compliance with the agreement.

"Nippon is throwing a financial lifeline to U.S. Steel while allowing it to remain led and managed by U.S. persons with government oversight," said Nicholas Klein, a CFIUS lawyer with DLA Piper. "I would think that CFIUS could mitigate the risk of reduction in steel production capacity through supply assurance and other common mitigation measures."

The committee, which reviews foreign investments for national security threats, also sees risk arising from Nippon's growing presence in India, where production costs are much lower than in the U.S.

"Nippon Steel has no economic incentive to, and will not, import Indian-origin...steel into the United States to compete with or undermine U.S. Steel, which would directly contradict the basis for Nippon Steel’s multi-billion dollar investment," the companies countered in their Tuesday letter.

Source: Theedgemarkets

In Australia, Q2 GDP printed broadly as expected at 0.2%qtr (1.0%yr). The themes of recent quarters were once again on display. The consumer remained weak, a 0.2% decline in Q2 leaving aggregate consumption just 0.5% higher than a year ago at June, and 2.0%yr lower on a per capita basis. Elevated inflation, interest rates and a historically-high tax take are increasingly putting household savings in a precarious position; on our estimates, around half of the pandemic savings ‘buffer’ has now been drawn down, and the savings rate held at just 0.6% in Q2. In tandem with weak sentiment, the status quo for income and savings suggests any pick-up in household spending will be gradual at best.

Other parts of the domestic economy were also soft in Q2. Despite rapid population growth and an existing need for additional capacity, new business investment and housing construction only managed to eke out a gain of 0.1%. Public demand continues to provide strong support for GDP growth however, its share of the economy rose to a fresh record high of 27.3%, with further gains likely over coming quarters. In this week’s essay, Chief Economist Luci Ellis puts the latest data in context.

On trade, the current account deficit slid further to –$10.7bn in Q2, in line with Westpac’s bottom-of-the-range forecast. The main surprise was the strength of spending from foreign students, which drove a 6.0% lift in total service exports. Contributions from other areas of the trade account were broadly as expected, service imports consolidating as outbound tourism flows normalised whilst the goods trade surplus narrowed on falling commodity prices and flatlining resource export volumes – a theme still evident in the July data for Australia’s trade in goods.

Before moving offshore, a final note on housing. The latest CoreLogic data continues to highlight a varied picture by capital city, the smaller capital cities of Perth, Adelaide and Brisbane recording solid gains while Sydney remains subdued and Melbourne goes backwards. The lack of sustainable upward momentum in dwelling approvals points to risks for residential construction activity once existing projects are worked through. 

Elsewhere, US data was the focus. The ISM manufacturing and non-manufacturing indexes rose by 0.4 and 0.1pts to 47.2 and 51.5 respectively, remaining below their 5-year pre-COVID averages. The market showed particular concern over the surveys’ price measures; however, these indexes are still in line with their 2015-2019 averages, a period when core PCE inflation averaged 1.6%yr and peaked at 2.0%yr. The ISMs meanwhile suggest employment is declining in manufacturing and only edging higher in the service sector. A similar view was provided by the latest Beige Book from the Federal Reserve, with employment assessed as steady overall, but with “isolated reports” of reduced hours and shifts as three districts reported slight activity growth and nine districts no or negative growth.

More constructive was the July JOLTS report. Though job openings fell to 7.673mn, their weakest print since January 2021, the hiring and separation rates were little changed at 3.5% and 3.4%, consistent with pre-pandemic rates – a robust period for job growth.

The shift in risks now openly being discussed by FOMC members has led some market participants to fear a disappointing read for August nonfarm payrolls tonight. Overall though, the labour market data points to a continued moderation in employment growth not a sustained decline. The best response to such a turn of events is steady, confident policy easing, 25bps at a time at successive meetings, all the while noting a willingness to do more if necessary. This is why we expect a 25bp cut at each FOMC meeting from September 2024 to March 2025 and, after that, another cut per quarter to year end, bringing cumulative easing over the cycle to 200bps.

This looks to be the approach being taken by the Bank of Canada in the north, another 25bp cut delivered this week at its September meeting along with clear guidance more easing will follow assuming current trends persist. While GDP growth surprised in Q2, the quarter is assessed to have ended on a weak note. The labour market also continues to slow as excess supply puts “downward pressure on inflation”, limiting the significance of persistence in shelter and some other service prices.

Providing fresh capital to companies restructuring their debt has been “the best opportunity in the corporate credit market over the last year or two”, according to Sculptor Capital Management’s chief investment officer Jimmy Levin.

Liability management exercises, where companies get controversial financings that prioritise newer creditors over their existing ones, have become more common over the last decade. To Levin, who’s also Sculptor’s executive managing partner, it’s “just capitalism at work”.

“The job of the credit investor is to make sure you can see around that corner to avoid being on the wrong side and hopefully be on the right side,” he said in an interview with Bloomberg Intelligence’s Credit Edge podcast.

Borrowers exploiting loopholes in agreements to raise new financing, at the expense of a group of existing lenders, often pits one set of investors against another. That’s leading to more so-called “creditor-on-creditor violence”.

A response to those debt maneuvers has been cooperation agreements, which creditors sign to ensure that borrowers aren’t able to reach a deal with one group of creditors while lumbering others with losses. Those agreements are just the “ping-ponging of capitalism”, Levin said.

Asset-based finance is another area of opportunity for investors, Levin said, defining it as all types of credit risk that aren’t corporate credit or single-name real estate credit.

Because it’s a wholesale-funded market, the opportunities arise not just from cyclical shocks like higher rates, or more secular trends like banking regulation, but also because it’s less efficient.

“It’s a market that’s nowhere near as mature as the corporate credit market,” he said. “And so, the opportunity comes by waiting for what falls through the cracks.”

Source: Theedgemarkets