19th January 2024

1. China's Record Trade Surplus

• China’s trade surplus hit a record $992 billion in 2024, driven by strong exports and weak imports. However, threats from the incoming Trump administration to impose new tariffs may hurt future growth.
• Exports surged to $3.6 trillion, with a large share going to the US, which imported $525 billion worth of Chinese goods last year.
• US companies rushed to stock up on Chinese products ahead of expected tariffs, fueling export growth.
• China’s surplus with the US fell to $361 billion, while trade surpluses with Southeast Asia and the EU rose sharply.
• Economists warn that Trump’s tariffs could severely weaken exports in 2025. Chinese firms may divert goods to other markets, especially Southeast Asia, to dodge US levies. Falling export prices have also dampened revenue despite high shipment volumes.

2. The United States' Startling Outperformance

Let's continue the theme of government bonds, but with a growth angle:

• Yields on government bonds are mainly driven by what investors think short-term interest rates will be in the future.?
• U.S. Treasury yields are higher than German bond yields because the European economy is weaker, leading to lower rates there. U.S. inflation has also been more persistent, so that's a factor!
• However, bond yields across countries often move together — when U.S. Treasury yields rise, German bond yields tend to rise too as investors shift money for better returns.
• In the U.S., rising Treasury yields can signal economic strength if they reflect strong growth expectations, which is generally good for corporate profits. However, remember that rising yields increase borrowing costs, which may hurt profits.
• Despite inflation remaining above the Fed’s 2% target, it has dropped significantly from its 2022 peak.?
• The U.S. economy continues to outperform other major economies, making it a leader in the global landscape.?
• This stronger growth outlook is a key reason U.S. yields are climbing.

3. UK Bond Selloff Eases after Inflation Cooling

The yield on UK government bonds fell after a surprise cooling in the inflation rate.

• U.K. consumer prices rose 2.5% year-over-year in December 2024, down from 2.6% in November, surprising economists who expected no change.

• Services prices showed significant cooling, with the annual increase rate falling to 4.4% from 5% in November, the lowest since March 2022.

• The Bank of England (BOE) is expected to continue cutting interest rates gradually, with another 0.25% cut likely in February 2025.

• U.K. government bond yields eased slightly after the inflation report but remain elevated due to global and domestic concerns.

• Investor concerns about fiscal policies and slower BOE rate cuts contribute to higher borrowing costs for the U.K. government.

• Chancellor Rachel Reeves reiterated her commitment to fiscal rules despite rising borrowing costs.

4. Fines or Carbon Credits:?It's the Carmakers' Choice

• European carmakers, especially Volkswagen, may need to buy carbon credits from Chinese EV manufacturers to avoid hefty fines for not meeting 2025 EU emission targets.

• They face choices of paying fines, discounting EVs, or buying credits.

• Pooling emissions with other companies is an option, but it is controversial as it may empower Chinese rivals.

• The EU's strict rules and the fast-warming climate in Europe add pressure on carmakers to transition to electric vehicles quickly.

Harry Mills | Director, Oku Markets

• Subscribe to our email newsletter: https://okumarkets.com/newsletter
• Read our recent email newsletters: https://subscribepage.io/oku-markets
• Visit our websites: https://okumarkets.com | https://okuprivate.com
• Visit our LinkedIn: https://www.dhirubhai.net/company/okumarkets