Tight Rope Walking

By Jane Foley, Senior FX Strategist at Rabobank

Gloom had re-emerged in the US stock market by the close of Friday’s session. This time the trigger was provided by reports that Taiwan’s chipmaker TSMC has asked suppliers to delay the delivery of high-end chip-making. This served as a reminder that demand is looking wobbly in various parts of the world. High oil prices, the UAW auto-workers strike, an ECB rate hike last week and the proximately of a slew of central bank meetings this week all contributed to the more cautious tone.  Shares in Asia this morning were broadly lower, though US and European futures are managing a more mixed tone.

Negotiations between GM and the union resumed yesterday, Ford and Stellantis are due to meet with union representation again today. The latter hiked its wage offer over the weekend to match that of GM and Ford, though there is still a large gap between what is on offer and what workers are demanding. In view of labor market shortages, sticky inflation, and the movement towards increased electric vehicle (EV) production the outcome of these talks may have broad-reaching implications. 

At the end of last week, the shares of German automakers were pushing lower on fears that they could come off worse should China retaliate against potential tariffs by the EU on imported Chinese EVs.  Beijing called the European Commission’s investigation into Chinese electric vehicle subsidies “protectionism” and warned that it could damage economic relations at a time when German car exports to China have already been weakening. Yesterday Reuters published a report indicating that the EU could become as dependent on China for lithium-ion batteries and fuel cells by 2030 as it was on Russia for energy in the approach to the Ukraine war. 

Chinese Foreign Secretary Wang Yi met with US National Security Advisor Sullivan in Malta over the weekend in the latest attempt to soften US-China relations ahead of a possible meeting between Presidents Biden and Xi. The Malta meeting comes four months after a secret meeting between Chinese and US officials in Vienna. In view of Xi’s absence from the recent G20 meeting in India, and the tensions between the US and China, there is concern as to whether he will show for the APEC gatherings in San Francisco in November. 

The Malta meeting has taken place at a time of rising speculation about the transparency, and possibly, durability of Xi’s leadership. A second Chinese minister has reportedly been removed from public view. Defense Minister Li Shangfu has apparently disappeared, this follows the absence of former Foreign Minister Qin Gang. 

A major outcome from the recent G10 meeting was the proposal to build a high-speed train, road and port project that would link India, the UAE, Saudi Arabia, Jordan, Israel, and Europe. The project would be seen as an alternative to China’s ‘belt and road’ initiative. Over the weekend Ankara has pushed back, suggesting there should be no corridor that does not include Turkey. President Erdogan has instead proposed that the route should pass through Turkey.