World Cup is over, back to pending challenges
It has been an eventful week on a couple of fronts, including Brexit, trade wars, President Trump’s visit to the U.K., the World Cup, the Wimbledon Tennis Tournament and last but not least the changing government in Turkey. President Erdogan revealed his new administration early last week, appointing his son-in-law, Berat Albayrak, as the Treasury and Finance Minister in charge of the economy. Investors mainly had expected either market-friendly Mehmet Simsek or ex-Minister of Finance Naci Agbal. The escalating concerns about the independence of the Central Bank pressured the lira against all major currencies to new record highs. Also, Turkey’s benchmark 5.75 percent 2047 eurobonds slipped to a cash price of 78.5, after starting the week at 83. With a new decree, Erdogan is now authorized to appoint the officials and governors of the Central Bank.
On Brexit, The U.K. PM, Theresa May, published the blueprint for Britain’s exit plan from the EU in March 2019. The white paper confirmed an intended soft exit. The core of the idea is for a free-trade area for goods with the EU. The proposal would give the UK the flexibility to strike trade deals around the world. The plan includes a complicated scheme to keep Britain inside the bloc’s customs territory and maintain “frictionless trade” in goods and services between the UK and EU.
On trade war issues, the U.S. government released the list of $200 billion Chinese exports potentially subject to a 10 percent tariff on July 11. This is a significant escalation in the trade war between China and the U.S. Both sides are confident of winning a trade war, which makes for unfettered trade tariffs and retaliatory measures, driven by the U.S. with corresponding respons- es by China. Even so, China sees the trade war crimping the growth rate to 6 percent in the fourth quarter, from 6.8 percent in the first quarter of this year.
On the U.S. and the EU front, the escalation has begun already. Should the U.S. move forward and impose import car tariffs, Deutsche Bank economist Marc de-Muizon believes the EU response would follow its previous steel aluminum tariffs response. The retaliatory tariffs pose a challenge to the U.S. decision alongside other trade partners via the WTO dispute settlement mechanism and, if need be, the introduction of safeguard measures to protect the EU car industry from U.S. imports being diverted to the EU.