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Companies expect strong Asia earnings despite recession fears: Analyst

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A Chinese national flag flies in front of a building under construction in the central business district of Beijing, China.

Giulia Marchi | Bloomberg | Getty Images

A Chinese national flag flies in front of a building under construction in the central business district of Beijing, China.

Despite fears of slowing growth globally, companies seem set for a relatively strong performance this year — especially in Asia, according to one expert.

That is, guidance from companies on their expected earnings for this year have been “pretty good,” said Ken Wong, Asia equity portfolio specialist at asset management firm Eastspring Investments.

“Despite all this talk (about the) trade war slowing down economic growth, companies are still seeing a fairly decent amount of earnings growth expectations for 2019,” he told CNBC’s “Street Signs” on Tuesday.

Talk of a recession heightened in the last few weeks as developments in March sent ominous signs of a potential downturn. For one, the yields on long-term U.S. debts became lower than those of short term debts: A so-called yield curve inversion is widely regarded as one of the most reliable recession indicators in the market

On top of that, weak economic data also stoked fears: Manufacturing activity in the eurozone dropped to its lowest level in more than six years in March. And, the U.S. Federal Reserve, adopted a significantly dovish stance, projecting no further interest rate hikes this year, and justifying its more temperate outlook by cutting the 2019 growth outlook for the U.S.

All those signals “had a lot of people spooked,” Wong said. “But then, we started talking to companies … when they reported their numbers, what they said to us was: Actually, 2019 is looking to be pretty solid, things are picking up.”

Such companies are still expecting double-digit growth in markets like China, Hong Kong and India, he added.

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China unveils rate reform to steer funding costs lower for firms

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China’s central bank unveiled a key interest rate reform on Saturday to help steer borrowing costs lower for companies and support a slowing economy that has been hurt by a trade war with the United States.

The People’s Bank of China (PBOC) said it will improve the mechanism used to establish the loan prime rate (LPR) from this month, in a move to further lower real interest rates for companies as part of broader market reforms.

Analysts say the move, which came after data that showed weaker than expected growth in July and followed a cabinet announcement on Friday, underscores the government’s attempts to use reforms to support a slowing economy.

“By reforming and improving the formation mechanism of LPR, we will be able to use market-based reform methods to help lower  real lending rates,” the PBOC said in a statement published on its website.

The central bank will “deepen market-based interest rate reform, improve the efficiency of interest rate transmission, and lower financing costs of the real economy,” it said.

Chinese banks’ new LPR quotations will be based on rates of open market operations, and the national interbank funding center will be authorised to publish the rate from Aug. 20, the PBOC said. It added the rate will be published every month on the 20th, effective this month.

Banks must set rates on new loans by mainly referring to the LPR and use LPR as the benchmark for setting floating lending rates, the PBOC said, adding that banks will be barred from setting any implicit floor on lending rates in acoordinated way.

The central bank said five-year and longer tenors will be added to the existing one-year LPR, which will help banks set rates on long-term loans such as mortgages.

China will add eight small banks, including two foreign-funded banks, to the existing 10 nation-wide banks that will be allowed to submit LPR quotations, the central bank said.

The move followed pledges from China’s State Council on Friday that the country will rely on market-based reform measures to help lower real interest rates for companies.

The central bank said that it will strengthen its supervision on banks’  rate quotations and punish banks for irregularities that disrupt the market order.

The central bank will incorporate LPR application into its macro-prudential assessment (MPA) to urge banks to use LPR pricing.

Sharper Slowdown

This week’s data broadly showed China’s economy stumbled more sharply than expected at the start of the third quarter, as the intensifying trade war with the United States took a heavier toll on businesses and consumers.

Second-quarter economic growth slowed to a near 30-year low. Tang Jianwei, an economist at Bank of Communications in Shanghai, said the reform could be seen as a guided rate cut as PBOC can guide rates of its open market operations, which will be closely followed by the LPR.

“The tool (LPR quotation reform) equals to a guided rate cut, and is only pushed out by the PBOC at crucial moments,” said Dai Zhifeng, analyst with Zhongtai Securities Co.

The central bank has pledged to gradually unify two interest rate “tracks” – its market-based rates developed in recent years and its benchmark bank deposit and lending rates.

Analysts say the new LPR rate will be lower than the current level, but they are divided over the scope of reductions on borrowing costs for firms.

To free up funds for lending and to accommodate local government project financing, most analysts still expect the central bank will cut banks’ reserve requirement ratios (RRR) further in coming months, on top of six reductions since early 2018.

Sources have told Reuters that more aggressive action such as interest rate cuts are a last resort, as it could fuel a sharper build-up in debt.

In July, central bank head Yi Gang said China would keep its benchmark deposit rate for a relatively long time, but would phase out its benchmark lending rate in the push to unify the benchmark lending rate and market-based rates.

China’s banks currently price their loans based on the benchmark lending rate that has been kept unchanged since October 2015, hampering the central bank’s efforts to lower borrowing costs.

The PBOC launched the LPR in 2013 to reflect rates that banks charge their best clients. But the LPR has been reacting little to market demand and supply, with the one-year rate currently at 4.31%, versus benchmark one-year lending rate of 4.35%.

China’s short-term money market rates have been falling more quickly in recent months due to the central bank’s cash injections.

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US issues warrant to seize Iranian tanker off Gibraltar

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The United States has issued a warrant to seize an Iranian oil tanker caught in the standoff between Tehran and the Westin a last ditch effort to prevent the vessel from leaving Gibraltar.

The Grace 1 was seized by British Royal Marines at the western mouth of the Mediterranean on July 4 on suspicion of violating European Union sanctions by taking oil to Syria.

Gibraltar lifted the detention order on Thursday after the British territory’s chief minister said he had secured written assurances from Tehran that the cargo would not go to Syria.

But with the vessel and its 2.1 million barrels of oil free to leave, the United States launched a separate legal appeal to impound the ship on the grounds that it had links to Iran’s Islamic Revolutionary Guard Corps (IRGC), which it designates as a terrorist organization.

A federal court in Washington issued a warrant to seize the tanker, the oil it carries and nearly $1 million.

“A network of front companies allegedly laundered millions of dollars in support of such shipments,” the U.S. attorney for the District of Columbia, Jessie Liu, said in a news release.

“The scheme involves multiple parties affiliated with the IRGC and furthered by the deceptive voyages of the Grace 1.”

The U.S. State Department did not immediately respond to a request for comment on how the warrant, which was addressed to “the United States Marshal’s Service and/or any other duly authorized law enforcement officer,” may be enforced.

The Pentagon declined to comment, as did Britain’s Foreign Office.

Asked on Friday about the U.S. intervention, Gibraltar’s chief minister, Fabian Picardo, said that would be subject to the jurisdiction of Gibraltar’s Supreme Court. “It could go back to the court absolutely.”

The Gibraltar Chronicle newspaper reported that the vessel was unlikely to sail before Sunday, citing an unnamed source who added that it was waiting for six new crew members including a captain to arrive.

The Grace 1 had its name erased and it was no longer flying a Panama flag.

Iranian state television had quoted Jalil Eslami, deputy head of the country’s Ports and Maritime Organisation, as saying the tanker would depart for the Mediterranean after being reflagged under the Iranian flag and renamed Adrian Darya.

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Trump having dinner with Apple CEO Tim Cook

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U.S. President Donald Trump speaks with Tim Cook, chief executive officer of Apple Inc., during an American Workforce Policy Advisory board meeting in the State Dining Room of the White House in Washington, D.C., U.S., on Wednesday, March 6, 2019.

Al Drago | Bloomberg | Getty Images

President Donald Trump tweeted on Friday that he plans to have dinner with Apple CEO Tim Cook.

“Having dinner tonight with Tim Cook of Apple. They will be spending vast sums of money in the U.S. Great!” he tweeted on Friday.

It’s not the first time that Cook and Trump have dined together. The two moguls have met several times, and last August Cook had dinner with Trump in Bedminster, New Jersey, at Trump’s golf club.

Trump was in in Bedminster, New Jersey, this week, according to media reports.

The second part of Trump’s tweet is referring to a press release Apple put out on Thursday in which it described the money it spent on U.S.-based suppliers and vendors.

In the release, Apple said it employs 90,000 people in the United States, and spent $60 billion on U.S. suppliers.

Apple opposes tariffs on imports from China, one of Trump’s primary issues. It assembles many of its products in China. Earlier this week, the Trump administration granted a temporary reprieve on some products imported from China that were due for a 10% tariffs, including iPhones and MacBook laptops.

Bank of America estimated that if 10% tariffs were to be placed on the iPhone and other major Apple goods that Apple could face a drop of 50 to 75 cents per share per year.

Apple didn’t immediately return a request for comment.

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