News of the week summary - 09/24/2023

EU to investigate Chinese subsidization of the electric vehicle industry

European Commission President Ursula von der Leyen has called for an investigation into China's massive subsidies for the electric vehicle industry. She expressed concerns about unfair competition, emphasizing that the EU won't tolerate the distortion of the playing field. The European Commission has already initiated an anti-subsidy probe that could lead to tariffs on Chinese EV imports. Beijing has criticized this move as protectionism, which could lead to potential retaliation. German Foreign Minister also supports the investigation, highlighting the need for the EU to reduce its reliance on China.

China's substantial state support for the EV industry adds to the growing global subsidies provided by the US, China, the UK, and Europe. China is a significant market for German automakers like Volkswagen and Mercedes-Benz, which could be adversely affected if tariffs are imposed on Chinese vehicles. It raises complex challenges for the EU in balancing trade ties with China, supply chain concerns, and national security risks.

Central banks worried as oil nears 100$ per barrel again

Surging oil prices, approaching $100 per barrel, have raised concerns among central bankers worldwide. This development presents a challenge to the central banks' efforts to control inflation, especially as it coincides with a "higher-for-longer" interest rate outlook. Crude oil's spike has raised questions about whether this is a temporary blip or a lasting trend. Central bankers are now assessing the implications of oil prices for inflation and economic growth.

The impact of rising oil prices on inflation and growth varies across different regions. If oil prices average $100 per barrel through the fourth quarter, it could lead to significant inflationary effects in the US, the euro area, and the UK. This would potentially affect bond markets, leading to higher yields and changes in central bank policies.

Central banks are now weighing the challenge of higher commodity prices and the potential impact on economic growth versus inflation. The rise in oil prices is occurring at a time when consumer balance sheets are already strained, which could further dampen consumer spending. 

Long-term US Treasuries continue falling

The price of a US Treasury bond maturing in May 2050 has fallen below 50 cents on the dollar, which is unusual for such a safe investment, causing concern among investors. This situation reflects the challenges faced by investors who purchased longer-term bonds with low-interest rates during the pandemic and are now dealing with the Federal Reserve's monetary policy tightening.

Long-term US Treasury bonds have been particularly affected, as they have high price sensitivity to changes in interest rates. These bonds have lost value due to rising yields, even though they have a unique property known as positive convexity, which means they gain value more than they lose when yields change.