Investors finally take notice of the return of inflation… The main issue last week was the sharp sell-off in US bonds with yields rising 20 basis points as investors finally…This content is for Silver Membership, Gold Membership, 1-month Free Trial and Diamond Membership members only. Log In Get a 1-month Free Trial
– Moms and Pops keep US equities going, but risks are mounting Rising interest rates and rising stock markets usually do not go well together. However, at the moment the…This content is for Silver Membership, Gold Membership, 1-month Free Trial and Diamond Membership members only. Log In Get a 1-month Free Trial
SUMMARY US Bonds Yields made a major Break-Out to the upside, The Dow Jones made a new all-time High, but momentum is weak and Tech is rolling over, Chinese Equities…This content is for Silver Membership, Gold Membership, 1-month Free Trial and Diamond Membership members only. Log In Get a 1-month Free Trial
Weekly Markets Review.
Sep 8, 2018
In this issue
- Donald Trump’s political suicide !
- Inflation is back !
- Shorting Oil again ?
- The Week in Review
- The Markets in Charts
Donald Trump’s political suicide
In a week full of negative news on the political front for President Donald J. Trump, his renewed threat to impose additional tariffs on China on Friday sent the world equity markets roiling.
Weekly Markets Review. Aug 25, 2018 In this issue It is the Longest Bull Market in History ! Buy the YUAN … and Chinese Equities !Sell The Japanese Yen…
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Weekly Currency Markets Review July 22, 2018
Last week, the trade war between the US and China have evolved into a currency war with Donald Trump tweeting that China and Europe were keeping their currencies artificially low.
In our various posts relating to the Trade War, we highlighted the fact that the ultimate goal of the Trade War was actually a structural revaluation of theChinese RenMinBi, a natural and needed evolution at this stage of China’s development, and the rapport de force will not end until China accepts to change its currency policies.
The initial action of China, when faced with the prospects of the US sanctions was to allow its currency to depreciate so as to compensate the 0.2 to 0.5 % negative impact on its GDP the tariffs would cause.
In June 2018, the Chinese Yuan fell by the most since 1999, and a wind of panic did set-in until the PBOC clearly intervened on Friday.
Granted, using the calculation methodology of the IMF, the Yuan could be considered to be overvalued by 6% at current levels and therefore be allowed to depreciate without causing alarm.
However, the methodology used by the IMF which privileges interest rate differentials is defined to measure fair currency parities of the currencies of mature economies with balanced GDP structures.
When it comes to developing economies that have an economic model relying primarily or still heavily on low added value exports and suffer from structural trade and current account surpluses, the model is ineffective because the primary driver of the surpluses is am imbalance in competitiveness due to imbalanced currency parities.
And China is very much in this configuration, as was Japan in the 1980s, a country that still relies massively on exports and that has had structural trade and current account surpluses for decades now.
In the past few months, and as we detailed in our recent post CHINA DRAWS THE LINE IN THE SAND, China’s trade surplus has accelerated again in the past few quarters and the trade deficit with the US has reached record levels.
Many Economists link the acceleration of the recent months to the stronger momentum of the US economy in the past few quarters, but nevertheless, China’s growth – and imports – remain strong and are not really decelerating and the US is only coming back to levels of growth that are considered to be healthy and normal 3 to 4 % averages.
The sustainability and acceleration of the Chinese trade surpluses is structural in nature and Donald Trump has a at least one quality, he puts the issue on the table.
Looking at the problem from a different angle, in fact, there are NO OTHER WAYS to reduce the structural and persistent trade surplus of China with the USA and the rest of the world but to finally allow its currency to =&0=&
One can turn the problem upside down and in every direction, the surpluses are structural by nature and do come from a currency maitained artificially low by the Chinese.
The one and unique target of the current trade – currency war is the Chinese Yuan and Donald Trump has clearly indicated that he would not let go !
The question then becomes :
Can China afford the Trade/ currency war and will it accept to play ball with the rest of the world ?
The recent bout of depreciation of the Chinese currency, as did the one of 2015, for the same reasons, created havoc in the Chinese financial markets, a collapse in equities and a massive flight of capital as Chinese investors and consumers took refuge outside of the RenMinBi.
In June 2018, the sudden depreciation of the Yuan cerated panic in the world commodity sphere and metals in particular, areas where the Chinese are the biggest buyers and the biggest players.
Our Readers must understand that the Chinese have little faith in their own Government and the Chinese Communist Party when it comes to fairness, transparency and the respect of individual rights.
They are extremely quick to rush for the exits, with whatever means they have at their disposal when they feel that Government policies could affect their hard-earned savings.
Capital flights, and stock market liquidations, quickly become uncontrollable and in 2015, it took China more than 18 months and 25 % of its foreign exchange reserves to calm the panic.
China has no interest in a repeat of the phenomenon, particularly not at this crucial stage of its development.
The economy fared well in the first and the second quarter of 2018 at 6.8 and 6.7 % growth respectively, but is bound to decelerate in the next two quarters if the consensus figure of 6.5 % for the whole of 2018 is correct.
Moreover, China’s deleveraging campaign is in full force and the significant decrease in shadow banking and the fight against excessive corporate leverage are the tip of what amounts to a significant deflationary phenomenon.
China’s equity benchmarks have already fallen by 25 % since their January peak, inducing a negative wealth effect and postponing the intended benefits of the opening up of the Chinese financial markets to foreign investors.
Any additional market turmoil could have a significant impact on China’s growth rate ahead.
On the other hand,
China’s booming real estate prices and significant increase in household debt indicates that Chinese investors need to recycle their surpluses abroad as well instead of piling in all at once in their domestic asset prices.
The success of the Hong-Kong Shanghai link has been a one-way thing, as Chinese mainland investors bought hong-kong listed securities massively, but foreigners remained timid until now.
An appreciation of the Chinese Yuan at this stage would actually have limited downside for the Chinese economy while potentially having extremely positive benefits.
By making foreign goods cheaper in relative terms, the trade balance would probably re-adjust itself not by a massive drop in exports but by a significant increase in imports. Chinese exports are now for most part, intrinsic components of the world’s manufactured products and substitution is not that easy.
By making the Chinese and Chinese corporations wealthier in relative terms, a revaluation of the Yuan would trigger a significant wave of Chinese buying foreign assets such as real estate reducing domestic excesses and speculation and keeping housing costs under control,
By nurturing a sentiment that the Yuan is bound to appreciate structurally, foreign investors would start buying Chinese bonds and equities at a much faster clip, triggering a wage of valuation expansion that would help Chinese corporations to raise more equity funding and reduce their reliance on debt,
By letting the Yuan appreciate smoothly, China would keep a lid on inflationary pressures and reduce interest rates, boosting liquidity and economic growth.
The truth of the matter is that in fact IT IS IN CHINA’S BEST INTEREST to drive its currency higher, BUT THE CHINESE APPARATUS IS SLOW TO MOVE and accepting this new paradigm takes time.