Capital Fund International

Hong Kong-based shipping giant Orient Overseas International on Monday report an interim net profit of US$138.9 million for the first half of 2019, swinging from a loss of US$10.3 million this time last year.

Overall revenue for the company rose 6 per cent to US$3.3 billion in the first half of this year from US$3.1 billion in the same period last year.

The result allayed some concerns about the US-China trade war, which has been disrupting trans-Pacific trade and industry since US President Donald Trump first levied tariffs on Chinese goods in February 2018.The company said higher revenue from its container shipping and logistics division, which swung from a loss of US$3.1 million in the first half last year to a profit of US$152.7 million this year, helped its bottom line. Profit at its property division, however, stood at US$53.8 million this year, down from US$61.7 million in the first half of 2018.

The company pointed to a rising Ebit margin in its shipping business as well as steady demand for container shipping services, despite the trade war uncertainty. Orient Overseas executives said the synergies achieved with parent company Cosco helped boost margins.
Michael Fitzgerald, Orient Overseas’ deputy chief financial officer, said the typically low-value items carried on the company’s ships might enjoy some immunity from tariffs. The largest single commodity shipped by Orient Overseas on its trans-Pacific routes is furniture and lighting products.
“Most of the items shipped by container are low-value items,” said Fitzgerald, adding that “tariffs probably wouldn’t affect people’s decision to purchase such items”, particularly when the US economy continues to do well.

Fitzgerald added that “each time there are new tariffs, there is front loading [by importers]”, but this would also raise inventory costs, offsetting gains. He said it was impossible to predict the impact of future tariffs.
Last year, China Ocean Shipping Company, or Cosco Group, completed a US$6.3 billion purchase of Orient Overseas as part of the ongoing consolidation in the industry. Cosco and Orient Overseas are ranked third globally in container shipping, and account for 12.6 per cent of global container capacity. Maersk, the world’s largest container ship operator, accounts for 17.9 per cent.

OOCL’s massive cargo container vessel arrives in Hong Kong
Orient Overseas, through its container shipping line Orient Overseas Container Line, currently operates six of the top 10 largest container ships in the world, all launched in 2017 and deployed on Asia to Europe routes.
The company’s trans-Pacific eastbound volume grew just 0.3 per cent year to date, compared with 7.3 per cent year to date in 2018. Trans-Pacific trade accounts for 39 per cent of Orient Overseas’ shipping revenue, while Inter-Asia and Asia to Europe routes account for 31 per cent and 20 per cent, respectively.

Orient Overseas reported a drop of 2 per cent in its volume of trans-Pacific trade, which was offset by a 7.9 per cent rise in revenue per twenty-foot equivalent unit (TEU) in the first half of 2019. Revenue for trans-Pacific trade overall rose by 5.8 per cent in this period.
Trade media has reported that so far, shipping alliances that deal in trans-Pacific trade have cancelled enough sailings to keep spot rates high, despite lower growth in trade volume.
Meanwhile, Orient Overseas expects to complete the sale of its Long Beach Container Terminal for US$1.78 billion, a significant influx of cash, by the end of this year. Fitzgerald said no decision had been made on what to do with the money, but it would be one of the first decisions to be taken by the board when the money was in the bank. Uncertainty around the trade war was the main issue for Orient Overseas, he said.

Adding to the overall uncertainty is the implementation of IMO 2020, which mandates that shippers switch to low sulphur fuel supplies, or install “scrubbers” on ships, which cut the amount of sulphur emissions coming from ships. It is unknown how much more expensive the low sulphur fuels would be and how well shipping customers will accept higher costs. Orient Overseas said it would be fully compliant with IMO 2020 as of January 1, 2020, and hinted that it was looking at LNG-powered vessels as one way of cutting carbon emissions in the future. The industry has been debating how to prepare for future restrictions on greenhouse gas emissions.

“Carriers can be forgiven for not having all of the answers in such times. One suspects that even Nostradamus would throw his hands up in despair, such is the volatility of the leading characters,” Simon Heaney, shipping analyst at Drewry, said in a July research note.

The world’s first 30-year bond featuring zero income struggled to find buyers, prompting Germany’s debt agency to admit the sale may have been “too large.”

The nation failed to meet a 2-billion-euro target ($2.2 billion) for the auction of notes maturing in 2050, signaling that negative yields across Europe may finally be taking their toll on demand. It’s another sign that the global bond rally may be coming to a halt now that more than $16 trillion of securities have negative yields.

“The broader conclusion is that this is an ominous sign for cash bonds,” said Antoine Bouvet, a rates strategist at ING Groep NV, looking ahead to the end of a summer lull in European issuance next month. The jury is still out on whether this is “a turning point in the long-end rates rally, as the fundamental driver of lack of faith in central banks’ ability to reflate the economy is still there.”

Dwindling expectations for inflation and growth in coming years has led the European Central Bank to hint at a new wave of monetary stimulus next month, driving a rally across the region’s bond markets. The whole of Germany’s yield curve is now below zero — among the first major markets exhibiting such a trait — meaning the government is effectively being paid to borrow out to 30 years.

That drew the attention of U.S. President Donald Trump, who used it to launch another push on Twitter for the Federal Reserve to lower U.S. borrowing costs. Markets are waiting for comments by Fed Chair Jerome Powell and other central bankers meeting from Friday to discuss stimulus for the global economy at a gathering in Jackson Hole, Wyoming.

The German sale comes as Europe’s largest economy is priming the pumps for extra spending in the event of a crisis. While the nation is confined to strict laws on running a fiscal deficit, Finance Minister Olaf Scholz suggested Germany could muster 50 billion euros ($55 billion) should a recession hit. The economy contracted in the second quarter.

The country only sold 824 million euros of the zero coupon bond at a record-low average yield of -0.11%, while the Bundesbank retained nearly two-thirds of the debt on offer. The real subscription rate — a gauge of demand that accounts for retentions by the Bundesbank — fell to 0.43 times against 0.86 times at the previous sale of similar maturity bonds on July 17.

“This shows that there is less demand for 30-year bonds at negative yields,” said Marco Meijer, a senior fixed-income strategist at BNP Paribas SA. Still, Meijer doesn’t “see yields rising a lot in Europe.”

Germany’s debt agency said it was aware that the auction with a zero coupon might fail to drum up large investor interest.

“In the current environment it is difficult to issue in large volume a bond of this maturity,” said spokeswoman Alexandra Beust in Frankfurt. The agency “doesn’t view the sale as a failure — it doesn’t cause us a problem as we can take the remainder on our own books.”

Tantrum Risk

German 30-year bonds erased declines after the comments, with yields steady at -0.15% after having risen three basis points earlier in the day. Those on 10-year securities also steadied at -0.69%, near a record low touched earlier this month.

One of the triggers for a German bond selloff in 2015, after benchmark yields first neared 0%, was a poor 10-year auction that highlighted a loss of demand at low yield levels.

This time around, Commerzbank AG had expected demand to come from life insurers and macro investors, despite the yield curve flattening in recent weeks to drive down long-dated yields. German 30-year bonds are still attractive for U.S. investors, when hedged for currency swings, offering around a 2.6% yield, relative to around 2% on a 30-year Treasury.

“It is technically a failed auction,” said Jens Peter Sorensen, chief analyst at Danske Bank AS. “I am not all worried about this — as investors can always just buy in the future and do not need to participate in auctions.”

The Russian government unveiled on Monday a €390 billion plan to overhaul its economy by 2024, at the end of what should be President Vladimir Putin’s last term in office.

The investment programme, which features 13 so-called National Projects, follows the “May Decrees” signed by Putin after his re-election last year, in which he pledged to cut poverty in half and significantly boost life expectancy.

Where is the money going?
A quarter of the money (6.3 trillion rubles/€85.5 billion) has been earmarked to revamp the country’s core infrastructure. Roads and car safety will be the second biggest expenditure (4.78 trillion rubles/€64.4 billion), with ecology rounding up the top three (4.04 trillion rubles/€54.5 billion).

What are some of the goals?

Below are some of the biggest goals to be reached by 2024 outlined in the investment programme:

Digital economy: Increase domestic spending in the sector to three times the 2017 level; ensure at least 90% of softwares used by government institutions and 70% by state-run companies is Russian-made.

Education: Russia to break into the world’s 10 leading countries for education.

Demography: Increase the fertility rate to 1.7 per woman from an expected 1.63 in 2019.
Ecology: Reduce the level of air pollution in large industrial centres, including a decrease of at least 20% of total pollutant emissions to the air in the most polluted cities.
Science: Country to become one of the top five destinations for research and development; enhance Russia’s attractiveness to “leading foreign scientists” and “young promising researchers.”
Exports: Increase export volume of non-energy goods to $250 billion per year from an expected $160 billion in 2019 which represents a 64% increase.

How it will be financed?

Just over half of the money will come from the federal budget, according to the report. A further 5 trillion rubles will be paid by regions, while 7.5 trillion rubles will come from “extrabudgetary sources.”

Last August, ahead of the expensive investment programme, Russia’s government increased the country’s value-added tax (VAT) by from 18% to 20% which came into effect on January 1.

Prime Minister Dmitry Medvedev announced in December that interim results for the investment programme will be published annually.

BEIJING (Reuters) – China plans to ease capital requirement for infrastructure projects in the second half this year, in a bid to boost investment and fend off rising headwinds in the slowing economy, the state planner said.

The economy stumbled more sharply than expected in July, with infrastructure investment slowing further despite a flurry of growth measures over the past year as the intensifying U.S. trade war took a heavier toll on businesses and consumers.

In a work report submitted to a regular meeting of Parliament’s standing committee on Saturday, the National Reform and Development Commission (NDRC) said it will “reasonably expand effective investment” by lowering the requirement of the minimum capital ratio for some infrastructure projects.
Typically, infrastructure projects are financed by both equity and debt, but they need to meet a minimum equity ratio requirement prior to leveraging up through borrowing.

The Chinese government had announced in June that it would allow local governments to use proceeds from special bonds as capital for major investment projects, a move seen by analysts to make it easier for projects to meet the minimum capital ratio requirement and allows firms to leverage more loans from banks.

But S&P Global had noted Chinese authorities have “competing objectives” that are “often at odds with each other”, as Beijing is pressing local governments to stop hiding debt but also to borrow more to fund project to hit GDP growth targets.

“Local governments would be stretched to borrow more while recognizing billions of dollars in fresh liabilities—investors might flee,” it said in a note last week.
The NDRC added that it will also accelerate the issuance of local government special bonds to guide more investment in “key areas and major projects”.
It reiterated that China will keep a prudent monetary policy that is “neither too loose nor too tight” and guide funding costs lower for small and micro firms.

Finance Secretary Carlos Dominguez III has asked the Asian Development Bank (ADB) and the World Bank to conduct portfolio reviews on proposed projects in the Philippines.

He also urged the two institutions to consider unifying their procurement procedures and economic assessments.
“It would be a good idea that we meed with both of you, World Bank and ADB, on an annual basis to see how we are progressing with this collaboration,” Dominguez was quoted as telling ADB president Takehiko Nakao.

Both multilateral institutions have already committed to assisting the Philippines in its ambitious infrastructure program where the government seeks to spend over P8 trillion until 2022.
Just last month, the ADB and the Philippines signed a $1.3-billion loan for the first tranche of the Malolos-Clark Railway Project (MCRP), the Japan-led lender’s largest infrastructure project financing to date.

“We are accomplishing a lot because ADB is 100 percent behind us, especially with this assistance for the Malolos-Clark Railway Project and the secondary education support program,” said Dominguez.
“It is proof that the institution is very supportive of our growth,” he added.

Once finished, the MCRP is expected to cut the travel time from Metro Manila to the Clark International Airport to less than an hour. The trip takes two to three hours by car or bus at present.
It is expected to be partially operational in 2022, and is expected to accommodate about 342,000 passengers daily. This is expected to increase to as many as 696,000 passengers daily, traveling to Calamba by 2025.
The ADB last year said it was looking at the possibility of increasing annual lending to the Philippines to $2.5 billion from the previous average of $1.5 billion.

Meanwhile, the World Bank in June approved a $300-million loan to provide additional funding for the Philippines’ Pantawid Pamilyang Pilipino Program (4Ps).
“In the Philippines, ADB is already collaborating with the World Bank on the implementation of the government’s conditional cash transfer program and the rehabilitation and recovery efforts in Marawi, among others,” Nakao said in June.

EURUSD retraces the decline from earlier this month even as Federal Reserve officials tame speculation for a rate easing cycle, and the exchange rate may continue to consolidate over the remainder of the month amid the failed attempt to test the August-low (1.1027).

EURUSD catches a bid following the Fed Economic Symposium in Jackson Hole, Wyoming even though Chairman Jerome Powellwarns monetary policy “cannot provide a settled rulebook for international trade.”

The comments suggest the Federal Open Market Committee (FOMC) is in no rush to implement lower interest rates, and it remains to be seen if the central bank will reverse the four rate hikes from 2018 as the US economy shows little indications of an imminent recession.

In fact, recent remarks from Kansas City Fed President Esther George, a 2019-voting member on the FOMC, indicate that the central bank will revert back to a wait-and-see approach as the policymaker insist that “we’re in a good place as long as the consumer can continue to pull the economy forward.”

In turn, Fed officials may closely watch the fresh updates to the Durable Goods Orders report as demand for large-ticket items is expected to increase 1.2% in July after expanding 1.0% the month prior.

A positive development may encourage the FOMC to buy more time after delivering a rate cut in July, but signs of a slowing economy may produce headwinds for the US Dollar as Fed Fund futures now reflect expectations for at least a 25bp reduction on September 18.

As a result, the FOMC may have little choice but to insulate the economy from the shift in trade policy, and the central bank may continue to adjust the forward guidance as Fed officials are slated to update the Summary of Economic Projections (SEP) in September.

With that said, the monthly opening range sits on the radar for EURUSD, and recent price action raises the risk for a larger rebound in the exchange rate amid the failed attempt to test the August-low (1.1027).

The broader outlook for EURUSD is clouded with mixed signals as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with the 1.1100 (78.6% expansion) handle no longer offering support.
Will keep a close eye on the Relative Strength Index (RSI) as the oscillator comes up against trendline support, with a break of the bearish structure raising the risk a larger rebound in EURUSD.

The failed attempt to test the August-low (1.1027) has pushed EURUSD back above the 1.1140 (78.6% expansion) pivot, with the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) now on the radar.
Next area of interest comes in around 1.1270 (50% expansion) to 1.1290 (61.8% expansion) followed by the 1.1340 (38.2% expansion) region.