Brief USA: US/China Trade Pact – Wake Up America and more

In this briefing:

  1. US/China Trade Pact – Wake Up America
  2. Cybersecurity and ESG: Beyond the Breach
  3. Weekly Oil Views: Skinny US-China Trade Deal Promises Little Support for Oil

1. US/China Trade Pact – Wake Up America

  • Not So Fast:  Mainland China is NOT reducing tariffs on USD 138 bn of existing US imports at rates of 5%-25%, and will only suspend new tariffs. The exchange rate of CNY/USD remains at 7 and is weakening and more than offsets the existing tariffs on mainland Chinese goods.
  • Pie In the Sky:Under Phase 2, the US is demanding mainland China address SOE subsidies, cyber attacks, cross-border data flows, et al.   
  • Desperate For A Deal: US seems more desperate for a deal than mainland China, despite what President Trump is parroting .  

2. Cybersecurity and ESG: Beyond the Breach

Smartkarma aig systemic cyber risk

Cybercrime is the greatest threat to every company in the world.
                                                                    – Ginni Rommety, CEO, IBM

Note: There is a pronounced ESG angle to this report but the underlying subject – i.e., cybersecurity as investment risk – is relevant beyond the ESG context. This also applies to future reports in this series.

Phishing, data breaches, ransomware, malware, DDoS attacks, and Armageddon-esque scenarios of global cyberwarfare, cascading blackouts, descent into anarchy, and rampant cannibalism.
But let’s be realistic.
What matters to investors falls somewhere between a data breach and doomsday, at some rational intersection of probability and materiality. One thing is clear though: Cyber-risk is a big deal.

Cybersecurity has emerged as a top ESG concern for institutional investors – and in some cases as the top ESG concern, ranking higher than even the most quintessential of E, S, and G topics.

In a recent survey by RBC Global Asset Management, institutional investors ranked cybersecurity as their number one ESG concern – ahead of ESG mainstays like climate change, diversity and equality, and anti-corruption.

In fact, cybersecurity is rapidly permeating the ESG ecosystem including reporting standards, ESG products (e.g., data, ratings, indexes), and ESG disclosure guidance by stock exchanges.

There’s good reason for all the fuss.

ESG aside for a moment, cybersecurity is first and foremost a major source of general investing risk since cyber-attacks often result in serious business, financial and capital markets consequences.

We already knew that though.

And cybersecurity has been in the ESG lexicon for a while.

What’s new is a palpable sense of urgency, coupled with a more sophisticated view of cybersecurity and how it fits into the overall ESG context. Salient summary points are as follows:

  • An evolving cyber-threat landscape is pushing cyber-risk beyond familiar idiosyncratic risks – i.e., beyond the data breach – to include more abstract, complex, and malicious systemic risk.
  • For investors, greater levels of systemic cyber-risk, which is notoriously difficult to predict and manage, means more overall risk and a shift in its balance from security- to portfolio-level.
  • Certain kinds of systemic cyber-events, especially those affecting critical infrastructure sectors, can have dire Environmental, Social, and Governance impacts well beyond the affected issuers.
  • Cybersecurity Governance has been thrust into the ESG spotlight; from an obscure operational extra to a starring-role as a strategic concern demanding executive- and board-level oversight.
  • Not only is cybersecurity increasingly prominent on ESG agendas, but non-ESG organizations are looking at ESG reporting as an ideal framework for general cybersecurity disclosure.

In short the cybersecurity/ESG story is one of: 1) issuer cyber-Governance, and 2) the societal ESG impacts of systemic cyber-events. It’s a story best told through a series of sector-specific Insights.

My plan is to, periodically, cover systemic cyber-risk associated with critical infrastructure sectors (CIS), each in turn. The most imminent is on Utilities, with a pronounced Asia regional focus.

This report can stand on its own, but is intended as a contextual foundation for future reports.

3. Weekly Oil Views: Skinny US-China Trade Deal Promises Little Support for Oil

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The US and China finally announced a “phase-one” trade deal on Friday, the highlights of which were the suspension of a new tranche of 15% import tariffs that the US was set to impose on China starting December 15 and Beijing committing to boost purchases of American farm goods.

However, contradictory messages from Beijing and Washington on some of the key elements of the agreement, coupled with the lack of details and the bundling of some of the thorniest issues of their conflict into a potential “phase-two” deal prompted plenty of doubt and skepticism.

The partial deal gave crude a modest knee-jerk boost on Friday, which may not sustain and is certainly not expected to grow.

The stock markets cheered the news, but not too loudly. Crude settled about 1.5% higher on the day, well off its intraday highs.

The oil market will be scrutinising the implementation of the deal in the coming months, and look for concrete proof of global economic acceleration and signs of pick-up in oil demand growth to push up prices.

However, there is another agreement that has provided far more support to crude prices in recent weeks, a fillip that is likely to sustain. We look at the net impact of the two deals on crude.

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