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US-China tensions dominate APEC summit. The APEC summit, held in Papua New Guinea last weekend, failed to issue a joint statement for the first time in its 29year history. Chinese President Xi Jinping and US Vice President Mike Pence exchanged barbs as the US criticised China’s Belt and Road initiative for the debt burden on other nations that could compromise their sovereignty. Xi argued that the United States’ protectionist actions were ‘short-sighted’ and ‘doomed to failure’. The conflict dampened investors’ spirits, as they were hoping the APEC meeting would yield some kind of a truce between the US and China ahead of the G20 summit at the end of this month, where the nations’ presidents are scheduled to meet.

Brexit – with every breakthrough comes another hurdle. Last week, UK Prime Minister Theresa May was facing challenges from pro-Brexit Conservative MPs. However, claims by some Tories that they had secured enough submissions of noconfidence letters were dismissed this week. On Thursday, the UK and EU agreed on a draft declaration for their future relationship. The draft seeks to replace the Irish backstop – the most contentious part of Brexit – with alternative arrangements, which will still ensure the absence of a hard border between UK and Ireland. Staying on this topic, the text mentions the use of technologies to maintain a quasi-invisible Irish border. Moreover, the declaration calls for “a free trade, combining deep regulatory and customs cooperation.” These concessions from the EU could help May win more support back home. However, when May tried to sell her agreement on the future UKEU ties to Parliament, she got more opponents than backers of her plan. This points to a difficult vote in the House of Commons, that is set for around 10 December. Nevertheless, the deal first needs to be endorsed by EU leaders this Sunday. The problem is that Spanish Prime Minister Pedro Sánchez threatened to veto the draft Brexit deal over the issue of Gibraltar.

Markets greet Italy’s willingness for dialogue. On Tuesday, the European Commission published opinions on the budget plans of Eurozone countries. As widely expected, the Commission said it would start disciplinary procedures against Italy over violations of the bloc’s fiscal rules. Under EU fiscal rules, member states have to keep their budget deficit below 3% of GDP and their public debt below 60% of GDP. The Commission projects that Italy will breach the bloc’s limit of 3% by 2020. Moreover, Italy’s debt-to-GDP equals 132%, which is more than twice the EU limit. Thus, Italy is facing potential fines of 0.2% of Italian GDP, which could rise to 0.5% if Rome does not change its budget plans. However, markets shrugged off the EU’s verdict as sentiment was lifted by comments from Italian Deputy Premier Matteo Salvini, who said he was open to small tweaks in the budget and a ‘polite dialogue’ with the Commission. On Wednesday, the FTSE MIB (+1.4%) posted solid gains, while the Italy 10Y yield (3.47%; -15bp) tightened significantly. However, we note that Salvini said he would not back down on the core point of the budget, such as expensive promises on pension reforms, welfare benefits and tax cuts. Given the lack of any positive developments in the Rome-Brussels stand-off, even little signs of progress are taken positively by markets.

23 November 2018

8

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Morning Miner - 19 November, by Dmitry Glushakov et al

Morning Miner - 19 November, by Dmitry Glushakov et al

Morning Miner - 19 November, by Dmitry Glushakov et al

Week Endnotes

Also in the news

Average PM2.5 concentration fell 5.3% YoY in 338 Chinese cities in October to 36 micrograms per cubic metre (mg/m3), Reuters reports, falling 7.3% YoY in 10mo18 to 37mg/m3. The state standard is now at 35mg/m3, with October levels coming close to target. However, smog usually builds up in November-March due to coal-fired heating, meaning that November-March levels of pollution might provide clarity on the probability of further cuts in industrial production, including steelmaking.

Philippines might allow 9 mines to reopen if they meet certain conditions according to Reuters, with total nickel contained output from the 6 mines at 42kt in 2016, 2% of global supply. The government changed the status of the mines from closed to suspended and issued measures which have to be undertaken to resume operations. While this might slightly improve supply in the near future, the increase will be largely in nickel ore used primarily in NPI output.

India polished diamonds net exports gained 23% in value YoY in October, while volumes were up 76% YoY due to the low base of October 2017, when the import mix was skewed towards high-value stones, GJEPC reports. Rough diamonds net imports added 16% YoY in value, though volumes fell 2%. The mix of imported rough diamonds normalised, with the average imported price some 10% higher than the historical average for October, with no sign of a large inflow of small stones such as we saw in September. As such, midstream destocking continued in October, on our numbers, with the last four months 'value of polished exports to rough imports' ratio rising to its highest since November 2015.

23 November 2018

9