Friday, 6th of July 2018
Today is a first! It is day one of what might well evolve into being a new era! The U.S. tariffs on $34 billion worth of Chinese goods kicked in on Friday, taking the war of words between the nations into the real economic realm. China implemented retaliatory tariffs on some imports from the U.S., state media reported about two hours later, after new U.S. duties had taken effect. It’s unlikely to stop there, according to experts. In fact, there will be probably be “escalation upon escalation,” warned Geoff Raby, Australia’s former ambassador to China. Ahead of the Friday implementation of American and Chinese tariffs, Raby told CNBC that “it looks like the first shots to the trade war are about to be fired.” China has said it will not “fire the first shot,” but its customs agency made clear on Thursday that Chinese tariffs on U.S. goods would take effect just after U.S. duties on Chinese goods kick in. Raby, who was also his country’s former ambassador to the World Trade Organization, said that Trump seemed to be driven by “very short-term political considerations” ahead of U.S. mid-term elections in November.
Scary stuff, but somehow, “The Morning After”, i.e., right now, we see the US stock futures about flat, the US Dollar about flat as measured by the DXY at 94.05 including a small rise in the Euro to $1.1700, Gold is down fractionally as is Bitcoin… Another ‘Trump Storm’ in a teapot? Let’s all hope so, as this kind of rhetoric can spiral out of hand. ‘Capitalism’ is a dirty word for many intellectuals, but there are several studies showing that open economies and free trade are negatively correlated with genocide and war. Let’s hope that the White House actually reads these words…
The other, likely more dangerous, “forgotten” war of rhetoric is in the Gulf- Rising tensions between the United States and Iran are resurrecting long-held fears that the Iranian military will attempt to disrupt much of the world’s crude oil shipments by shutting the Strait of Hormuz. President Donald Trump’s decision to abandon the 2015 Iran nuclear deal and restore sanctions on the Iranian economy have stoked geopolitical risk and fuelled an oil price rally. The administration escalated the situation last week when the State Department revealed it is pushing oil buyers to cut off all Iranian crude imports by Nov. 4, sooner than many anticipated. Now, Iran is suggesting that if the United States succeeds in side-lining its exports, it will use its position along the Strait of Hormuz to stop other Middle Eastern countries from shipping their barrels to the world. In 2016, a record 18.5 million barrels per day passed through the Strait of Hormuz, the EIA estimated. That year, global oil demand was 96.6 million bpd, according to the Paris-based International Energy Agency. It’s also a critical passageway for liquefied natural gas, a form of the fossil fuel super-chilled to a liquid state for export. Top LNG exporter Qatar sent 30% of the world’s supply through the Strait of Hormuz in 2016, according to BP. On Thursday, the head of the IRGC, Mohammad Ali Jafari, told Iranian news agency Tasnim, “We will make the enemy understand that either all can use the Strait of Hormuz or no one,” Reuters reported. On Thursday, the U.S. Central Command told Reuters the nation’s navy is prepared to defend freedom of navigation and the free flow of commerce. Yes, do hold on to your exposure to energy as a hedge against global stupidity and hope with us that it will prove to be an unnecessary insurance policy.
This morning crude oil futures are trading fractionally up, WTI at $73.20/Bbl. Oil prices will rise more than previously expected in the second half of 2018, as the Trump administration aims to wipe out Iranian crude exports by November, Morgan Stanley forecasts. The tougher-than-anticipated U.S. policy means Iran’s production could fall by 1.1 million barrels per day (bpd) at a time of high oil demand. The bank also sees output declining more than it previously forecast in Libya and Angola, leaving the oil market undersupplied by about 600,000 bpd in the second half. As a result, Morgan Stanley said it now believes international benchmark Brent crude will average $85 a barrel over the next six months. That’s $7.50 higher than its previous estimate.
The Chinese currency is the first victim of the trade war… China’s currency hit its lowest level against the greenback in 11 months on Tuesday amid concerns that a tariff spat between Beijing and Washington could spiral into a full-blown trade war. Both the onshore and offshore Yuan crossed the 6.7 per dollar level for the first time since August 2017 during Tuesday’s Asian trading session, and now that the first salvo was fired, the CNY has risen somewhat to 6.64. The Yuan has built up losses of 3.25% in June, drawing comparisons to August 2015 when the central bank unexpectedly allowed the currency to weaken nearly 3% against the U.S. dollar — a move that triggered heavy capital outflows. Still, many don’t foresee a repeat of 2015. “August 2015 was a crisis caused by the central bank,” Iris Pang, greater China economist at ING, said in a note. “Today’s depreciation is market-driven, reflecting the risks of a trade war. This implies that the central bank is allowing market forces to dictate the speed of the depreciation when there is room to do so.” ING has revised its yuan forecast from 6.6 per dollar to 7 by the end of the year. And unlike 2015, there aren’t major concerns of a hard landing for China’s economy now, according to Claudio Piron, co-head of Asia rates and FX strategy at Bank of America Merrill Lynch Global Research.
What else is going on? Thankfully very little… Crypto-currency projects have been popping up left, right and centre in the past 18 months, but over 800 of those are now dead, adding to comparisons between the current digital coin market and the dotcom bubble in 2000. There has been an explosion in ICOs. Companies raised $3.8 billion via ICOs in 2017, but in 2018 so far, this number has already shot up to $11.9 billion, according to CoinSchedule, a website that tracks the market. However, hundreds of these projects are now dead because they were scams, a joke or the product hasn’t materialized. Dead Coins is a website that lists all the crypto-currencies that fall into those categories. So far, it has identified just over 800 digital tokens that it considers dead. These coins are worthless and trade at less than 1 cent. After tumbling some 70%from its peak, Bitcoin is reaching a point where even an authority like Mohamed El-Erian thinks it could be a buy. The chief economic advisor at Allianz, considered one of the most influential financial market thinkers in the world, said Friday that the crypto-currency would be worth considering if it falls before $5,000. Bitcoin was trading around $5,870 as El-Erian made his remarks. “I suspect that if you look 10 to 15 years down the road, we will have digital currencies but the public sector will have involvement in that. It will not be pure Bitcoin,” he said. “But the blockchain technology, take that seriously.”
This said, we prefer to remain focussed on markets for which we think we have a (better) understanding- The historic bull market in global equities still has room to run, according to Citigroup’s equity strategy team, which is advising clients to continue to buy. The firm’s analysts wrote that Citi’s bear market checklist that monitors symptoms of a downturn in equities suggests than only three of 18 “red flags” have been raised. The brokerage’s equity strategists still see a 9% climb in stocks worldwide over the next 12 months. Citigroup’s chief U.S. strategist, Tobias Levkovich, upgraded his rating on domestic equities to overweight from neutral despite extended valuations, citing a shift in market sentiment back into neutral territory. The strategist now sees 15% earnings per share upside in 2018 for the S&P 500 (or $153) and set a mid-2019 target of 2,865 for the index. It closed Thursday at 2,736. To be sure, both the Dow Jones Industrial Average and the S&P 500 have yet to rebound to their all-time highs notched in January, rattled by a 10% correction in February and modest-to-flat performance since. And then, we think that the bonds will not collapse anytime soon and expect yields to meander in a narrow band around the current levels.
We will end this week’s rumblings with a reminder to our leaders around the globe of Charles Darwin’s words “The very essence of instinct is that it’s followed independently of reason.”
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