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Investors sell stocks, dollar on fears Trump agenda is foundering

Asian stock investors joined a global retreat from riskier assets on Friday and the dollar wavered on rising doubts about U.S. President Donald Trump's ability to deliver his economic agenda.

European stock markets are also set for a negative start, with financial spreadbetter CMC Markets expecting Britain's FTSE 100 to open 0.5 percent lower, and Germany's DAX and France's CAC 40 to start the day down 0.7 percent.

Confidence was shaken further after a van mowed through crowds of tourists in Barcelona on Thursday, killing at least 13 people and injuring more than 100 in an attack that authorities were treating as Islamic terrorism.

In Cambrils, a town south of Barcelona, police said they had killed five attackers on Thursday night to thwart a linked "terrorist attack."

The MSCI World index slipped 0.1 percent, adding to Thursday's 0.8 percent drop and heading for a flat end to the week.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.5 percent, but still looked set to gain 1.4 percent for the week after tensions between North Korea and the United States came off the boil.

Japan's Nikkei slid 1.2 percent on global jitters and a stronger yen, and looked set to lose 1.4 percent for the week.

"The realization of the worst case scenarios (in Washington and in North Korea) would likely bring about a more significant drop in global equity markets," said Jingyi Pan, market strategist at IG in Singapore.

Until then, "sentiment may remain the driver for the fluctuations in the markets and could make for good entry opportunity for regional markets," she added.

Chinese blue chips slipped 0.2 percent, after data showed growth in new home prices slowed in July, but looked set for a 1.9 percent weekly gain as a year-long construction boom boosted shares of building materials firms.

Hong Kong's Hang Seng retreated 0.7 percent, up 1.05 percent for the week.

Overnight, Wall Street's major indexes slumped between 1.2 percent and 1.9 percent. The S&P 500 index posted its biggest drop in three months. (N)

Concerns have grown over Trump's ability to push through his economic goals, such as tax cuts and infrastructure spending, following the exodus of executives from two prominent business councils in reaction to his response to clashes last weekend in Charlottesville, Virginia.

Trump on Thursday decried the removal of pro-slavery Civil War Confederacy monuments, which have fueled U.S. racial tensions, stoking worries that some of his key policy staffers and aides may quit.

Chief among them were rumors that Gary Cohn, director of the National Economic Council, would resign, following Trump's defense of white supremacist protesters in Charlottesville.

A statement from the White House that Cohn intends to remain in his position calmed markets only briefly before selling resumed.

"Diminishing West Wing support from both business and political allies will continue to abrade investors’ confidence in President Trump’s economic agenda," Stephen Innes, head of Asia Pacific trading at OANDA in Singapore.

"The dollar, for the most part, remains in a state of directionless confusion, supported on the one hand by resurgent U.S. economic data yet burdened by the expanding White House rat’s nest."

The dollar posted its third session of losses against the yen, falling 0.25 percent to 109.31 yen and shrinking this week's gains to 0.3 percent.

The dollar index, which tracks the greenback against a basket of six major peers, was flat at 93.597, surrendering moderate early gains.

The index rose earlier on weakness in the euro, the biggest component of the basket, after minutes of the European Central Bank's July meeting showed policymakers were worried about a possible overshoot in the common currency, whose strength is making the bloc's exports less attractive and imports cheaper.

The euro inched up 0.1 percent to $1.1736, making up some of the previous session's 0.4 percent drop.

Bitcoin, which hit an all-time high of $4,480 in the previous session before closing lower, inched up 0.2 percent to trade at $4,285, up 17.6 percent this week.

In commodities, oil prices pulled back following recent gains.

Global benchmark Brent fell 0.1 percent to $50.99 a barrel, after jumping 1.5 percent on Thursday on a drop in U.S. inventories. It is on track for a 2.15 percent decline for the week.

U.S. crude also lost 0.1 percent to $47.05 on Friday, surrendering some of Thursday's 0.7 percent gain, heading for a 3.6 percent weekly loss.

Spot gold was steady on Friday at $1,286.85 an ounce, holding most of Thursday's 0.4 percent gain. It is set to end the week down 0.1 percent.

Industrial metals, which posted multi-year highs this week, waned on Friday as investors took profits.

Three-month copper on the London Metal Exchange was down 0.3 percent to $6,468.50 a tonne, extending Thursday's 0.6 percent drop.

Benchmark zinc, which set a new decade high of $3,147 a tonne on Thursday, closed lower but was up 1.05 percent at $3,094.50 on Friday.

Washington's mounting woes push S&P to biggest loss in three months

U.S. stocks sold off on Thursday, with the S&P 500 recording its biggest daily percentage drop in three months as escalating worries about the Trump administration's ability to push through its economic agenda rattled investors.

The benchmark index also closed at its lowest since July 11, with the day's move marking the first time since the Nov. 8 election of two days with more than 1 percent declines so close together. The index dropped 1.4 percent last Thursday, as concern over a possible conflict between the United States and North Korea hit the market.

The falls mark a break from a period of low volatility and subdued moves. The S&P 500 has had just four 1 percent declines this year.

Investors appeared to be losing faith in the Trump administration's ability to move forward with tax cuts and the rest of its domestic economic agenda, some strategists said. The latest cause for concern was speculation over the possible departure of National Economic Council Director Gary Cohn.

"You've elected a Republican administration which should be good news for the market, good news for business, and they're getting precious little done. And you had a big rally based on that," said Stephen Massocca, senior vice president at Wedbush Securities in San Francisco.

With valuation levels considered high in many stocks, investors may be more prone to sell. "Anything can be an excuse," he said.

Stocks rallied sharply after the election of Donald Trump as president, and even with the day's losses, the S&P 500 is up 13.6 percent since Nov. 8. The index is trading at 17.8 times forward earnings, well above its long-term average of 15, Thomson Reuters data shows.

The market was also on edge after a van crashed into dozens of people in the center of Barcelona killing at least 13 people in an attack claimed by Islamic State.

The Dow Jones Industrial Average (DJI) ended down 274.14 points, or 1.24 percent, to 21,750.73, the S&P 500 (SPX) lost 38.1 points, or 1.54 percent, to 2,430.01 and the Nasdaq Composite (IXIC) dropped 123.20 points, or 1.94 percent, to 6,221.91.

Stocks began to lose ground early in the session, following the speculation about Cohn.

A White House official later said Cohn intends to remain in his position. After a short respite, the market continued to sell off and picked up the pace into the close. All 30 Dow stocks fell, along with all components of the S&P 100 <.OEXA>.

On Wednesday, Trump disbanded two business councils, with several chief executives quitting in protest over his remarks on white nationalists.

Late on Thursday, the White House said Trump has abandoned plans to create an infrastructure advisory council. S&P e-mini futures opened 0.1 percent lower.

The U.S. stock market has not followed a 1 percent down day with a second straight day of losses since Trump was elected, so Friday's session could serve as a significant test of the market's resilience.

The S&P also was on pace for its worst back-to-back weeks since the election.

Disappointing corporate results weighed as well. Shares of Dow component Cisco Systems (O:CSCO) fell 4 percent a day after its results, while Wal-Mart (N:WMT) was down 1.6 percent after the retailer reported a drop in margins due to continued price cuts and e-commerce investments.

Small-cap stocks also sold off. The Russell 2000 index (RUT), a widely used gauge of small caps, closed below its 200-day moving average for the first time since June 2016.

Declining issues outnumbered advancing ones on the NYSE by a 4.55-to-1 ratio; on Nasdaq, a 3.89-to-1 ratio favored decliners.

It was also the seventh straight day in which the NYSE and Nasdaq had more stocks making new 52-week lows than highs, the longest stretch since Trump's election.

About 6.7 billion shares changed hands on U.S. exchanges. That compares with the 6.3 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Asia shares up as North Korea tensions ease, wary Fed pressures dollar

Asian stocks edged higher on Thursday as tensions between the United States and North Korea came off the boil, while the Federal Reserve's concerns about weak U.S. inflation weighed on the dollar.

European stocks look set for a weaker start, with financial spreadbetter CMC Markets expecting Britain's FTSE 100 to open down 0.2 percent, and Germany's DAX and France's CAC 40 to start the day down 0.3 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan added 0.55 percent.

U.S. stock futures were about 0.1 percent lower.

Japan's Nikkei slipped 0.1 percent, weighed down by a stronger yen as the dollar wilted and shrugging off data showing the country's exports rose for an eighth straight month in July.

Australian shares reversed earlier gains to fall 0.1 percent, dragged lower by a tumble in Telstra shares to a five-year low after the telecoms company said it would slash its dividend by 30 percent this financial year.

South Korean shares advanced 0.65 percent after the leaders of both North Korea and the United States appeared to back off from their heated rhetoric from last week.

South Korean President Moon Jae-in said Pyongyang would be "crossing a red line" if it put a nuclear warhead on an intercontinental ballistic missile, but that the U.S. had promised to seek Seoul's approval before taking any military action.

Trump on Wednesday praised North Korean leader Kim Jong Un for a "wise" decision not to fire missiles towards the U.S. Pacific territory of Guam, after North Korean media reported that Kim had delayed to decision while he waited to see what the U.S. did next.

While that helped Wall Street close in positive territory overnight, concerns on the home front sent the dollar into reverse.

Trump announced the disbanding of two high-profile business advisory councils on Wednesday after eight executives quit in protest over his remarks blaming weekend violence in Virginia not only on white nationalists but also on anti-racism activists who opposed them.

Moreover, minutes from the Fed's July meeting released on Wednesday showed the central bank grew more wary about recent weak inflation, with some policymakers wanting to halt interest rate hikes until it was clear the trend was temporary.

Money market futures are now pricing in about a 40 percent chance the Fed will raise rates by December, compared to just under 50 percent before the Fed's minutes.

"The Federal Open Market Committee minutes confirmed one thing, which is that the committee members are not on the same page and there is no clear date when the Fed will initiate the process of reducing the size of the balance sheet," Naeem Aslam, chief market analyst at Think Markets in London, wrote in a note.

"Trump dissolving his major business groups makes the investment community even more pessimistic because this sets the stage for even more failure for him."

The dollar fell 0.25 percent to 109.885 yen, extending Wednesday's 0.4 percent slide.

The dollar index, which tracks the greenback against a basket of six major peers, dropped 0.2 percent to 93.357 after Wednesday's 0.3 percent loss.

The Australian dollar advanced 0.2 percent to $0.7942 after the country added 27,900 jobs in July, beating expectations for an increase of 20,000.

The unemployment rate remained at 5.6 percent, as expected, although full-time employment fell by 20,300.

Sterling climbed 0.1 percent to $1.2908, extending Wednesday's 0.16 percent gain after wages rose faster than expected in the three months to June, and the unemployment rate fell to 4.4 percent, its lowest since 1975.

The euro rose 0.1 percent to $1.1785, extending its 0.3 percent gain overnight, after the euro zone's second-quarter growth was revised to 2.2 percent from a year earlier, from 2.1 percent previously.

Bitcoin, which has surged over $1,500 this month on speculative demand for the digital currency, slipped 1.4 percent to $4,317.49, but remained within a whisker of its all-time high of $4,400 touched earlier this week.

In commodities, oil prices edged up but remained close to a 3-1/2 week low touched earlier this week as rising U.S. production offset a decline in stockpiles by the most in a year.

U.S. crude was about 0.3 percent higher at $46.91 a barrel, failing to make up most of Wednesday's 1.6 percent slide.

Global benchmark Brent gained 0.5 percent to $50.52, after the previous session's 1 percent drop.

Industrial metals held gains following their surge overnight, underpinned by expectations of strong global demand and tight supplies.

Benchmark zinc on the London Metal Exchange set a new decade high of $3,145 a tonne on Thursday, and was last up 0.7 percent from its previous close at $3,140.

London copper gained 0.4 percent to $6,559 a tonne, after hitting $6,580, its highest level since November 2014, earlier in the session.

Gold advanced 0.4 percent to $1,287.91 an ounce, adding to Wednesday's 0.9 percent jump.

Fed minutes: Fed split over path of rate hikes

Federal Reserve policymakers were split on the outlook for future rate hikes, as fed members struggled to balance concerns over the slowdown in inflation with the growth in the labor market, according to the minutes of the Fed's last policy meeting released on Wednesday.

The details of the meeting, at which the U.S. central bank voted to keep rates unchanged, also showed that "some participants" expressed concerns about the slowdown in inflation, and said the Fed could afford to stand pat on interest rates until the decline in inflation subsided.

"... some participants expressed concern about the recent decline in inflation, which had occurred even as resource utilization had tightened, and noted their increased uncertainty about the outlook for inflation," the minutes said. "They observed that the Committee could afford to be patient under current circumstances in deciding when to increase the federal funds rate further"

On the Fed's plan to reduce its $4.5tn balance sheet, members agreed that the process of reducing the Fed's large portfolio of Treasury bonds and mortgage-backed securities should begin "relative soon" while others wanted to wait until the upcoming policy meeting.

"Participants generally agreed that, in light of their current assessment of economic conditions and the outlook, it was appropriate to signal that implementation of the program likely would begin relatively soon," the minutes said

Riskier assets ticked lower while gold added to gains as market participants viewed the minutes as dovish, after Fed members appeared less willing to view the slowdown in inflation as transitory.

"In considering the timing of further adjustments in the federal funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory".

The dollar fell 0.29% to trade at 93.47 while the U.S. 10-Year traded lower at 2.236.

Gold Futures, rose 0.52% to $1,286.31.

Dollar revived by U.S. data tonic, North Korea respite

The dollar hoarded hefty gains on Wednesday after strong U.S. retail sales revived the chance of another Federal Reserve rate hike this year, while Asia stocks inched ahead as tensions in the Korean peninsula went off the boil.

European bourses looked set for a somnolent start with Eurostoxx 50 futures (STXEc1) steady, while E-Mini futures for the S&P 500 (ESc1) were also barely changed.

North Korean leader Kim Jong Un has delayed a decision on firing missiles towards Guam while he waits to see what the United States does, as Washington said any dialogue was up to Kim.

The break in threat and counter-threat was enough for South Korean stocks (KS11) to bounce 0.5 percent, though they remain well short of a record peak touched last month.

The next flash point could be a joint U.S.-South Korean military exercise starting on Aug. 21.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) edged up 0.3 percent and Japan's Nikkei (N225) lost 0.1 percent.

There was no clear lead from Wall Street, where the Dow (DJI) ended on Tuesday up 0.02 percent. The S&P 500 (SPX) lost 0.05 percent and the Nasdaq (IXIC) 0.11 percent. (N)

The economic news, however, was much more emphatic, with U.S. retail sales rising the most in seven months in July as consumers spent more on 10 of 13 retail sectors.

Importantly, upward revisions to sales for both May and June countered concerns that consumption had entered a downtrend and lifted the outlook for economic growth.

Investors reacted by narrowing odds on the Fed tightening again this year and sent two-year Treasury yields (US2YT=RR) up to 1.36 percent, from 1.29 percent on Friday.

Minutes of the Fed's July meeting are due later in the session and should show how the debate on rate hikes is shifting within the central bank.

"The minutes will show a Committee that is likely to announce a change in balance sheet policy at the September meeting," wrote analysts at JPMorgan (NYSE:JPM) in a note.

"We think the minutes will be less forthright about the timing of the next rate hike, which we still expect to occur in December."

BITCOIN BONANZA

The dollar duly rallied to its highest level against a basket of major currencies in nearly three weeks and was last holding at 93.824 (DXY).

The euro dipped to $1.1740, though it had found solid support around $l.1686 overnight.

The yen took an added blow from the easing in risk aversion and sagged to 110.64 per dollar . The dollar's 1.4 percent jump on Tuesday was the biggest daily rise since April.

Sterling also slumped after UK inflation numbers came in below forecast, breaching key support levels against both the euro and dollar. The pound was last at $1.2863 , having shed 1.1 percent the previous session.

All that action paled in comparison to the digital currency Bitcoin, which has surged over $1,200 so far this month to reach $4,100 amid fevered speculative demand.

"Interest in digital currencies has spiked recently as proponents tout benefits such as a lack of centralized control and limited supply," said William O'Loughlin, an investment analyst at Rivkin Securities.

"However, anyone thinking of buying the currency should realize that it is incredibly volatile and could fall in value as quickly as it rose."

In commodity markets, the revival in risk appetite dragged gold back to $1,272.90 an ounce , and away from Friday's two-month top of $1,291.86.

Oil prices nudged higher after data from the American Petroleum Institute showed a much larger fall in crude inventories than expected. [O/R]

U.S. crude (CLc1) added 21 cents to $47.76 per barrel, while Brent (LCOc1) firmed 26 cents to $51.06.

Oil edges up on falling US crude stocks, but global glut weighs

Oil prices edged up on Wednesday, lifted by declining U.S. crude inventories, although markets were still restrained by general oversupply.

Market focus was turning to the release of official U.S. Energy Information Administration data later on Wednesday for a further update on inventories.

Brent crude futures (LCOc1) were at $51.06 per barrel at 0651 GMT, up 23 cents, or 0.45 percent, from their last close.

Traders said that reports of a dip in Libyan output to between 130,000 and 150,000 barrels per day (bpd), down from 280,000 bpd, had supported Brent.

U.S. West Texas Intermediate (WTI) crude futures (CLc1) were at $47.71 a barrel, up 16 cents, or 0.3 percent.

U.S. crude inventories fell by 9.2 million barrels in the week to Aug. 11 to 469.2 million, industry group the American Petroleum Institute said on Tuesday.

That compared with analyst expectations for a decrease of 3.1 million barrels.

"The market took this as a mildly bullish report," said William O'Loughlin of Australia's Rivkin Securities.

However, gasoline stocks climbed by 301,000 barrels, compared with analyst expectations for a 1.1 million barrel decline.

More broadly, analysts said ample supplies were preventing prices from moving much higher.

"Excessive supply ... is continuing to weigh on oil prices ... Not a lot has changed despite the OPEC and Russia efforts recently. While these producers have tried to limit their oil output, U.S. shale oil continues to rise," said Fawad Razaqzada, analyst at futures brokerage Forex.com.

The Organization of the Petroleum Exporting Countries together with non-OPEC producers like Russia has pledged to restrict output by 1.8 bpd between January this year and March 2018.

Offsetting much of that effort, however, U.S. oil production has soared by almost 12 percent since mid-2016 to 9.42 million bpd.

"OPEC and Russia still face an uphill battle in reducing the global supply surplus in the face of growth in output elsewhere and less than compliant behavior in their midst (Iraq, UAE)," said French bank BNP Paribas (PA:BNPP).

On the demand side, analysts see a gradual slowdown in fuel consumption growth.

In the United States, energy consultancy Wood Mackenzie said gasoline demand was already peaking due to improving fuel efficiency and the rise of electric vehicles.

In China, state-owned China National Petroleum Corporation (CNPC) said on Wednesday that gasoline demand would likely peak around 2025 and outright oil consumption would top out around 2030.

This means that oil demand from the world's two biggest consumers may soon stall, while consumption has already peaked in Europe and Japan.

Crude oil slumps 2.5% to settle at 3-week low

Crude futures settled lower on Monday, as data showed Chinese demand for oil eased in July while concerns over a rise in Opec output continued to weigh on sentiment.

On the New York Mercantile Exchange crude futures for September delivery fell 2.5% to settle at $47.59 a barrel, while on London's Intercontinental Exchange, Brent lost 2.76% to trade at $50.67 a barrel.

Chinese refineries processed 10.71 million barrels per day (bpd) in July, National Bureau of Statistics (NBS) data showed, down around 500,000 bpd from June and the lowest rate since September 2016.

The nearly twelve-month low for Chinese refinery activity comes against concerns that a glut of refined fuel products could lessen demand for oil, reducing the prospect of oil inventories falling below the five-year average, adding further pressure on oil prices.

Meanwhile, investors continued to mull over data released last week, from Opec and the International Energy Agency, showing an uptick in oil production from the cartel in July to 33 million barrels a day.

In May, Opec producers agreed to extend production cuts for a period of nine months until March, but stuck to production cuts of 1.2 million bpd agreed in November last year.

Meanwhile, oilfield services firm Baker Hughes reported on Friday, its weekly count of oil rigs operating in the United States ticked up by three rigs to a total of 768, suggesting that U.S. production may start to taper.

“The slowing rig count will mean that U.S. production will start to level off and drop,” said Phil Flynn, senior market analyst at Price Futures Group, in a daily email.

Asian shares, dollar rally as North Korea blinks

Asian shares rose and the dollar rallied on Tuesday after North Korea's leader signaled that he would delay plans to fire a missile near Guam, easing tensions and prompting investors to move back into beaten-down riskier assets.

Futures suggested the cheer was carrying over into European trading, with the Eurostoxx 50 (STXEc1) up 0.2 percent, DAX futures (FDXc1) up 0.3 percent and FTSE futures (FFIc1) up 0.1 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) was 0.3 percent higher in afternoon trade, with Australia (AXJO) up 0.4 percent. South Korea's markets were closed for a holiday.

Helped as well by a weaker yen, Japan's Nikkei stock index (N225) finished up 1.1 percent, a day after skidding 1 percent to a 3-1/2-month low.

"Worries about a conflict between the United States and North Korea are not completely gone, but the market seems to be settled now," said Masashi Oda, general manager at the strategic investment department at Sumitomo Mitsui Trust Asset Management.

On Wall Street on Monday, U.S. stocks recovered from last week's selloff, when fears of such a conflict helped wipe out nearly $1 trillion from global equity markets. The S&P 500 (SPX) posted its biggest one-day percentage gain since April. (N)

S&P 500 e-mini futures (ESc1) were up 0.2 percent in Asian trade.

North Korea's leader Kim Jong Un received a report from his army on its plans to fire missiles towards Guam and said he would watch the actions of the United States for a while longer before making a decision, the North's official news agency said on Tuesday.

U.S. President Donald Trump did not have any fresh words for Pyongyang, but Defense Secretary Jim Mattis warned on Monday that the U.S. military would be prepared to intercept a missile fired by North Korea if it was headed to Guam.

"We have North Korea saying they will wait, and Trump not saying anything at all, compared to his past promise of 'fire and fury,'" said Mitsuo Imaizumi, chief FX strategist at Daiwa Securities.

"That added up to good news for the dollar, bad news for the yen," he said.

The yen tends to gain in times of crisis on assumptions that Japanese investors will repatriate assets.

The dollar was up 0.7 percent at 110.38 yen , pulling further away from last Friday's low of 108.72 yen, while the euro gained 0.5 percent to 129.76 yen (JPYEUR=).

The euro was 0.2 percent lower on the day against the dollar at $1.1757 , while the dollar index, which tracks the greenback against a basket of six major rivals, added 0.3 percent to 93.662 (DXY).

Against the Swiss franc the dollar rose 0.3 percent, after jumping more than 1 percent on Monday.

Higher U.S. yields also gave the dollar a lift. The yield on the benchmark 10-year U.S. Treasury note (US10YT=RR) rose to 2.246 percent from its U.S. close of 2.218 percent on Monday.

The dollar rose as traders unwound their bearish bets made last week after Friday's disappointing U.S. inflation data dampened expectations that the Federal Reserve would raise interest rates again this year.

But New York Fed President William Dudley rekindled rate-hike hopes on Monday, saying that it was not unreasonable to think the central bank would begin trimming its $4.2 trillion balance sheet in September and raise rates again this year, provided economic data holds up.

Market pricing for the odds of a December hike has moved back to roughly 50-50.

Crude oil futures steadied after tumbling more than 2.5 percent on Monday in volatile trade. [O/R]

U.S. crude futures (CLc1) rose 3 cents to $47.62 a barrel. Brent crude (LCOc1) added 6 cents to $50.79.

Spot gold prices plunged 0.7 percent to $1,273.22 an ounce, extending their fall from Monday when they shed half a percent. [GOL/]

Trump's NAFTA autos goals to collide with industry as talks start

The Trump administration has set a collision course with the auto industry as it launches renegotiations of the 23-year-old NAFTA trade pact this week, aiming to shrink a growing trade deficit with Mexico and tighten the rules of origin for cars and parts.

More than any other industry, autos have been the focus of U.S. President Donald Trump's anger over the North American Free Trade Agreement, which he blames for taking car factories and jobs away from America to low-wage Mexico.

The United States had a $74 billion trade deficit with Mexico in autos and auto parts last year, the dominant component of an overall $64 billion U.S. deficit, according to U.S. Census Bureau data.

"The Trump administration has framed their NAFTA negotiating objectives around reducing the trade deficit with Mexico," said Caroline Freund, a senior trade fellow at the Peterson Institute for International Economics. "If they don't touch autos, there's no way of getting at what they want."

Among tools that U.S. Trade Representative Robert Lighthizer may seek to boost auto employment in the U.S. is strengthening the rules of origin to shut out more parts from Asia, and possibly an unprecedented U.S.-specific content requirement for Mexican vehicles.

Lighthizer's negotiating objectives for NAFTA seek to "ensure the rules of origin incentivize the sourcing of goods and materials from the United States and North America," which has raised concerns among auto industry executives and trade groups that he will seek a deal that guarantees a certain percentage of production for the United States.

The industry is opposed to such a carve-out or to increasing the percentage of a vehicle's value that must come from the region above the current 62.5 percent - already the highest of any global trade bloc.

They say this would raise costs and disrupt a complex supply chain that sees parts crisscrossing NAFTA borders and has made North American car production competitive with Asia and Europe.

"Our members feel very strongly that rules of origin are not the tools to use to reshore jobs into the U.S.," said Ann Wilson, senior vice president of government affairs for the Motor and Equipment Manufacturers Association, a trade group representing auto parts makers.

Wilson and other industry advocates say a better way to boost U.S. manufacturing jobs is through policies aimed at expanding vehicle exports.

PARTS THRESHOLD

But if U.S. Commerce Secretary Wilbur Ross gets his way, it would be harder to reach the 62.5 percent content threshold because the "tracing list" of parts that count towards that goal would be modernized. He argues the current rules are too loose and allow a tariff-free "back door" for Chinese auto parts.

Parts that did not exist when the 300-plus page list was devised in the early 1990s, largely electronics sourced from Asia such as console touch screens or hybrid-drive controllers, do not count against reaching the threshold. If they are put on the list, companies would have to source them from North America or pay tariffs on them.

If the content requirements become too onerous, automakers will simply skip compliance "and they'll just end up paying the duty," said Charles Uthus, vice president for international policy at the American Automotive Policy Council, a lobbying group for Ford Motor (NYSE:F) Co., General Motors (NYSE:GM) and Fiat Chrysler.

Foregoing all NAFTA tariff-free access benefits - something that could happen if Trump is dissatisfied with the negotiations and decides to scrap the trade pact - would raise costs by about $4 billion-5 billion a year, Ulthus added. Ford plans about $7 billion in total capital spending this year.

DISPUTE MECHANISM DISPUTED

Among the other contentious NAFTA issues that U.S., Canadian and Mexican negotiators will tackle starting on Wednesday in Washington is the future of a mechanism for resolving trade disputes.

The United States wants to eliminate a so-called "Chapter 19" provision, arguing that it fails to combat unfair subsidies of some Mexican and Canadian goods. Mexico and Canada have vowed to keep the provision.

Negotiators are expected to pursue new NAFTA chapters governing digital trade, and tightening environmental and labor standards, changes previously agreed by the three countries as part of the now-defunct 12-country Trans-Pacific Partnership.

U.S. negotiators will also seek a provision to deter currency manipulation, aiming to set a precedent for future trade negotiations, such as a revised U.S.-North Korean deal or a bilateral pact with Japan.

The negotiations face an extremely tight timeline, with officials saying they want to complete negotiations by early next year to avoid ratification difficulties posed by elections in Mexico in July 2018 and in the U.S. in November 2018.

Freund, a trade economist for more than a decade at the World Bank and International Monetary Fund, said the negotiators should focus on a few key areas.

"If you really want to do a full-blown modernization of NAFTA, it's going to take a lot more than six months," she said. "Ultimately I think they're going to get bogged down in all these details and pick two to three things and have a smaller agenda."

North Korea factories humming with 'Made in China' clothes, traders say

Chinese textile firms are increasingly using North Korean factories to take advantage of cheaper labor across the border, traders and businesses in the border city of Dandong told Reuters.

The clothes made in North Korea are labeled "Made in China" and exported across the world, they said.

Using North Korea to produce cheap clothes for sale around the globe shows that for every door that is closed by ever-tightening U.N. sanctions another one may open. The UN sanctions, introduced to punish North Korea for its missile and nuclear programs, do not include any bans on textile exports.

"We take orders from all over the world," said one Korean-Chinese businessman in Dandong, the Chinese border city where the majority of North Korea trade passes through. Like many people Reuters interviewed for this story, he spoke on condition of anonymity because of the sensitivity of the issue.

Dozens of clothing agents operate in Dandong, acting as go-betweens for Chinese clothing suppliers and buyers from the United States, Europe, Japan, South Korea, Canada and Russia, the businessman said.

"We will ask the Chinese suppliers who work with us if they plan on being open with their client -- sometimes the final buyer won't realize their clothes are being made in North Korea. It's extremely sensitive," he said.

Textiles were North Korea's second-biggest export after coal and other minerals in 2016, totaling $752 million, according to data from the Korea Trade-Investment Promotion Agency (KOTRA). Total exports from North Korea in 2016 rose 4.6 percent to $2.82 billion.

The latest U.N. sanctions, agreed earlier this month, have completely banned coal exports now.

Its flourishing textiles industry shows how impoverished North Korea has adapted, with a limited embrace of market reforms, to sanctions since 2006 when it first tested a nuclear device. The industry also shows the extent to which North Korea relies on China as an economic lifeline, even as U.S. President Donald Trump piles pressure on Beijing to do more to rein in its neighbor's weapons programmes.

Chinese exports to North Korea rose almost 30 percent to $1.67 billion in the first half of the year, largely driven by textile materials and other traditional labour-intensive goods not included on the United Nations embargo list, Chinese customs spokesman Huang Songping told reporters.

Chinese suppliers send fabrics and other raw materials required for manufacturing clothing to North Korean factories across the border where garments are assembled and exported.

FACTORIES HUMMING

Australian sportswear brand Rip Curl publicly apologized last year when it was discovered that some of its ski gear, labeled "Made in China", had been made in one of North Korea’s garment factories. Rip Curl blamed a rogue supplier for outsourcing to "an unauthorized subcontractor".

But traders and agents in Dandong say it's a widespread practice.

Manufacturers can save up to 75 percent by making their clothes in North Korea, said a Chinese trader who has lived in Pyongyang.

Some of the North Korean factories are located in Siniuju city just across the border from Dandong. Other factories are located outside Pyongyang. Finished clothing is often directly shipped from North Korea to Chinese ports before being sent onto the rest of the world, the Chinese traders and businesses said.

North Korea has about 15 large garment exporting enterprises, each operating several factories spread around the country, and dozens of medium sized companies, according to GPI Consultancy of the Netherlands, which helps foreign companies do business in North Korea.

All factories in North Korea are state-owned. And the textile ones appear to be humming, traders and agents say.

"We've been trying to get some of our clothes made in North Korea but the factories are fully booked at the moment," said a Korean-Chinese businesswoman at a factory in Dalian, a Chinese port city two hours away from Dandong by train.

"North Korean workers can produce 30 percent more clothes each day than a Chinese worker," said the Korean-Chinese businessman.

"In North Korea, factory workers can't just go to the toilet whenever they feel like, otherwise they think it slows down the whole assembly line."

"They aren't like Chinese factory workers who just work for the money. North Koreans have a different attitude -- they believe they are working for their country, for their leader."

And they are paid wages significantly below many other Asian countries. North Korean workers at the now shuttered Kaesong industrial zone just across the border from South Korea received wages ranging from a minimum of around $75 a month to an average of around $160, compared to average factory wages of $450-$750 a month in China. Kaesong was run jointly with South Korea and the wage structure - much higher than in the rest of North Korea - was negotiated with Seoul.

WORKERS IN CHINA

Chinese clothing manufacturers have been increasingly using North Korean textile factories even as they relocate their own factories offshore, including to Bangladesh, Vietnam and Cambodia.

"Wages are too high in China now. It's no wonder so many orders are being sent to North Korea," said a Korean-Chinese businesswoman who works in the textiles industry in Dandong.

Chinese textile companies are also employing thousands of cheaper North Korean workers in China.

North Korea relies on overseas workers to earn hard currency, especially since U.N. sanctions have choked off some other sources of export earnings. Much of their wages are remitted back to the state and help fund Pyongyang's ambitious nuclear and missile programmes, the U.N. says.

The new U.N. sanctions imposed on North Korea this month ban countries from increasing the current numbers of North Korean laborers working abroad.

China does not disclose official figures for the number of North Koreans working in factories and restaurants in China, although numbers are down from a peak period two to three years ago, according to Cheng Xiaohe, a North Korea specialist at Beijing's Renmin University.

"It's a hassle to hire North Korean workers though," the Korean-Chinese businesswoman from Dalian said. "You need to have the right set-up. Their living space has to be completely closed off, you have to provide a classroom where they can take classes every day. They bring their own doctor, nurse, cook and teachers who teach them North Korean ideology every day."

One clothing factory that Reuters visited in Dandong employs 40 North Korean workers. They fill smaller orders for clients who are more stringent about their supply chains and expressly request no production inside North Korea.

North Korean factory workers in China earn about 2,000 yuan ($300.25), about half of the average for Chinese workers, the factory owner said.

They are allowed to keep around a third of their wages, with the rest going to their North Korean government handlers, he said. A typical shift at the factory runs from 7:30 a.m. to around 10 p.m.

The workers - all women dressed in pink and black uniforms - sat close together behind four rows of sewing machines, working on a consignment of dark-colored winter jackets. The Chinese characters for "clean" and "tidy" were emblazoned in bold blue lettering above their heads and the main factory floor was silent but for the tapping and whirring of sewing machines.