Bedrock’s Newsletter for Friday 25th of May, 2018
25 May 2018

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 Friday, 25th of May 2018

The “Event of the week” is clearly Trump’s decision to forsake a Nobel- President Trump’s summit meeting with North Korean leader Kim Jong-un is off, for now. In any business deal – and this is one way to look at the once-scheduled meeting between the two heads of state – there is always jockeying to get the best deal. So, was this just two CEO’s trading mutual insults and insinuations to gain the upper hand? And could it be put back together, as the president hints in his letter to Kim? It might happen, but any summit meeting will still have to confront many difficult issues – and it is more likely that Kim has deliberately pulled the plug on the meeting to protect his equities and to set the stage for a later, possibly more successful meeting. In the first place the two sides were far apart in their expectations. The U.S. expected an immediate denuclearization, including Pyongyang giving up nuclear tipped ICBMs in return for U.S. promises, while Kim expected immediate lifting of economic sanctions in return for his promises to eventually “denuclearize,” with emphasis on the eventually. These disparate expectations were unsatisfactory for both sides, because there is no basis for trust by either party. Kim has seen what happened to Libyan dictator Muammar Gadhafi after he gave up his nuclear program and more recently, as in the Iran nuclear deal, that the U.S. is capable of walking away from a solemn agreement if it chooses to do so. On the other side, for years the North Korean regime has made promises and agreements, most of which it violated in secret or openly. No basis for trust. Both sides need to back away and recalibrate what they hope to achieve in the long term, and then put in place, through lower level working groups, a possible road map for getting there. Such a road map would be couched in terms of discrete steps, and verifiable basis. It would include military, economic, diplomatic and humanitarian steps, with each side moving cautiously and gauging the response of the other during implementation.

In other news, Bitcoin slumped Below $7,500. The drop from the recent peak tops 20%. Bitcoin fell to a six-week low, as selloff that began in early May. Wednesday’s decline came after OKEx, the most active fee-charging exchange over the past day, suspended withdrawals and fiat trading to fix an error that was leading to inaccurate account balances, according to a statement on its website. The declines on Wednesday also coincided with a selloff in financial markets, with stocks and commodities falling on fading optimism over the U.S.’s talks with North Korea and China. Ethereum was also down 5% on Wednesday, while Bitcoin Cash fell 9%. Oh, and this week Robert Shiller the Nobel laureate reiterated his warning about cryptocurrencies… worthless he says…

Also, this week a real currency has melted away, without being a Crypto anything-  The Turkish lira hit a record low, down 20% against the dollar this year. Now at 4.75 and not looking very appetizing…”We are bearish on the lira and always have been given its very weak external balances and with macroeconomic policy moving in the wrong direction as well,” said Kiran Kowshik, emerging markets forex strategist at UniCredit. A self-described “enemy of interest rates”, Erdogan wants borrowing costs lowered to spur credit growth and construction, and he said last week he would seek greater control over monetary policy after elections set for June 24.

Federal Reserve officials would be content to let inflation briefly run above their 2% target as the economy continues to recover, according to minutes from the central bank’s most recent meeting. Following the May 1-2 session, the policymaking Federal Open Market Committee said it wasn’t raising rates yet but added the word “symmetric” to describe its inflation goal. Market participants since have puzzled over what the change in language might imply. Well, these words should have pulled the handbrake on the Dollar’s recovery, but didn’t as we seethe “DXY”, the trade weighted Dollar index at 93.90 climbing up the chart to its highest level this year. Though Fed officials indicated in March that a total of three rate hikes this year were likely, traders in the fed funds futures market in recent days briefly put chances of a fourth hike above 50%. That probability has since declined to about 43%. The minutes indicate that central bank officials remain determined to keep increasing rates, but with the gradual approach that it has repeatedly pledged to take. US 10-year yield dipped below 3% after those Fed minutes showed willingness to let inflation tick up. The benchmark US ten-year note is trading at a gnat’s whisker under 3% yield, 2.977% to be precise…

The other corner of the market is oil- Oil prices have climbed in recent weeks, but whether that rise will continue for longer could be in doubt. “On a 12-month basis, which is the horizon we take, we think we’re more likely to be in sort of a $55 to $75 range, which is a little bit lower than where we are today,” Manpreet Gill, head of fixed income, currencies and commodities investment strategy at Standard Chartered Private Bank, told CNBC. “The reason for that is simply, when we look out beyond the next few months and really take that one-year view, we’re looking at the basic demand-supply fundamental. That’s what causes our bullish view all the way coming in over the past year or two. That’s what’s causing us to say, how much can this go if we start really looking beyond the next three months?” Gill said. Prices have risen recently amid concerns over the impact of potential U.S. sanctions on Venezuela’s oil exports following a disputed election which saw Venezuelan President Nicolas Maduro re-elected. Also, an executive order that prohibited U.S. citizens from participating in the sale of Venezuelan receivables linked to oil was signed by U.S. President Donald Trump on Monday, Reuters reported.

All this said and done, we remain optimistic on the global economy, still hold to our views of Amazon holding down inflation and that the Fed in its wisdom will ignore this and raise more, possibly in June, reigniting the US$ rally. Bonds seem comfortable where they are but we have a growing soft-spot for oil and energy. We would favor a further creeping up in prices. But this said, “We are here and it is now. Further than that, all human knowledge is moonshine.” H. L. Mencken

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Market Weekly Highlights

Currencies & Commodities

  • The greenback recorded new highs for the year this Wednesday continuing the rally it started last month. The Dollar Index DXY is higher for the week at 93.75.The USD has strengthened against the Euro since the beginning of the week and is currently hovering around 1.1700 as Euro Area growth momentum slows confirmed by the latest PMI data, and as fears on Italy continue to mount.
  • The CHF gained ground this week , as euro Area tensions resurfaces due to Italy’s situation. The EURCHF dropped to below 1.16 this Friday before recovering a bit and standing now at 1.1640.
  • The Pound traded lower this week and reached 1.33 after topping at 1.4375 last month. The JPY also strengthened this week moving from 111.40 to 109.00, remaining stronger for the year against the USD.
  • In EM, the Russian Ruble tumbled steadied at around 61.50, while the Turkish Lira went on free fall and reached 4.85 against the US$ at its low point, before recovering a bit to 4.72.
  • The Brazilian Real, has also moved lower, now at nearly 3.65, amid lower appetite for emerging market currencies sparked by trade-war fears, goepolitcal risks and rising US interest rates..
  • Bitcoin is now back down at 7’400, a big drop since the beginning of May.
  • Crude oil WTI trades lower for the week at $70.30 per barrel but stronger for the year amid the tensions fuelled by the Syrian/Iran events, lower US inventories and Iranian Sanctions; while Brent is trading at about $78.10.

Fixed Income

  • 10Y U.S. Treasuries yields, which had traded in a range during the last quarter of 2017 from 2.30% to 2.40% crossed 3.10% last week amid inflationary pressures and now trades below 3%.
  • The Japanese 10 year JGB yield opened the year 2018 at 0.053% and reached 0.10% in early February. It now stands at 0.040%, continuing to offer a POSITIVE yield.
  • In Europe, the German Bund yield nearly doubled at one point this year, jumping from 0.40% to 0.80%, but then came back down at around 0.45%, some bps above where it closed 2017. Same for the French 10Y Yield which had crossed the 1% during February and is now back to 0.74%.
  • In Peripheral Europe Italian 10Y yields are now just below 2.50% having jumped 60 bps higher in two weeks amid internal political turmoil, whilst the Spanish 10Y yields trades some 111 bps lower than Italy at 1.39% down from where it started the year at 1.61%.

Equities

  • Markets in the US are again positive for the Year 2018 with NASDAQ , SP500 and DJIA trading higher by respectively 7.55%, 2.03% and 0.37%. The DJIA is just above 24’810, the SP500 at around 2’720 while Nasdaq is trading some points above 7’420.
  • In Europe markets are showing positive returns for the year so far with the exeption of the Swiss Market SMI still down -4.53% and the Spanish IBEX 35 down 0.26%. Eurostoxx50, CAC 40 and Italian FTSE MIB are strongly up respectively by 1.06%, 5.00% and 3.84% while DAX and FTSE 100 up +0.37% and 0.68%.
  • In Asia, the Nikkei trades lower for the year so far marking -1.38% on the back of the reversal in yen, while Hang Seng and Bovespa are trading up at a strong + 2.24% and +4.87% respectively.

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