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Trade War Rattles Markets

Trump

Monday, June 4, 2018

Trump proceeds with trade war, China issues warning. Last week, the Trump administration moved forward with steel and aluminum tariffs on Canada, Mexico and the European Union. Meanwhile, China warned that any deal that it could reach with the U.S. would not go into effect if the U.S. moves forward with tariffs on China. The two countries are negotiating across a range of trade topics, including China purchasing U.S. exports to narrow the trade deficit. But Trump undercut these negotiations last week when he said he would move forward with 25 percent tariffs on $50 billion worth of Chinese goods. "If the United States introduces trade sanctions including a tariff increase, all the economic and trade achievements negotiated by the two parties will not take effect," said the Chinese statement, carried by the official Xinhua News Agency.

Chart Of The Week

(Click to enlarge)

- The Baltic Dry Index has declined by more than 22 percent from a peak in May. The index tracks shipping costs and is often used as a proxy for global economic demand.

- The dip in the index is one small piece of evidence pointing to a global economic slowdown.

- Other commodities, such as copper, have seen prices fall recently, also a negative sign for the health of the economy.

Markets

Global macro environment slowing down. A growing number of indicators point to a slowdown in the global economy. Business activity has fallen back from recent multi-year highs, according to the JPMorgan Chase and IHS Markit global purchasing managers index. Indices for both manufacturing and services are down. The Eurozone is also showing signs of worry amid growing political uncertainty. Investors are moving into lower-risk assets, which is causing some problems for global stock markets. "We generally think markets are in for a series of rude awakenings,” Joachim Fels, a global economic adviser at the money-management firm Pacific Investment Management Co., told the WSJ.

Airline profits revised down on headwinds. The International Air Transport Association trimmed its forecasted profit for the airline industry in 2018, a sign that rising fuel prices are starting to cut into business. Net income could hit $33.8 billion, or a cut of 12 percent from a previous forecast. The group also said that higher interest rates, trade protectionism, the end of the Iran nuclear deal and uncertainty regarding the Brexit are also concerns for the airline industry.

Related: The Crypto Market Is Much More Than Bitcoin

Eurozone investor confidence falls sharply. Italy announced the formation of a coalition government, overcoming a few weeks of instability. But Italian bonds have been rocked by the potential anti-EU makeup of the new government. Eurozone investor confidence fell to its lowest point since October 2016. Also, a measure of expectations for economic growth in the Eurozone plunged to a six-year low. The sudden implementation of U.S. steel and aluminum tariffs on the EU won’t help matters. On Monday, research institution Sentix said “Economic expectations in the eurozone are downright tilting,” while adding that investors appeared to be expecting a “serious slowdown in growth” in the Eurozone.

Commodities

Banks trading on commodity risk. Wall Street has become increasingly enamored with trading strategies that focus on buying and selling derivatives linked to risk premia in commodities. The idea centers on trying to isolate certain parameters such as spreads, liquidity, volatility and momentum rather than a simple bet on rising or falling prices. According to the FT, risk premia strategies have attracted $20 billion in commodity markets over the last two years, compared to just $13 billion for commodities hedge funds. Over the past year, funds focused on risk premia have earned 15 to 30 percent.

Fed rate hikes keep gold prices in check. A strong jobs report last week, which showed an uptick in wages, suggests more inflation is in store. That offers some validation for rate hikes from the Federal Reserve, and another increase could come next week, which “should keep the gold price in check until then,” according to Commerzbank.

Hurricane season begins, raising potential for commodities disruptions. 2017 was an epic year for storms in the Atlantic basin, causing havoc in commodities markets. The new hurricane season just began, and the recent tropical storm Alberto, which forced ExxonMobil to idle production temporarily in the Gulf of Mexico, was a shot across the bow. Last year, the hurricanes caused price spikes for oil, gasoline, natural gas, cotton, lumber, orange juice and other commodities. Last month, the National Oceanic and Atmospheric Administration said 2018 is expected to be a “near- or above-normal” year for hurricanes, with a 70 percent chance the season sees 10 to 16 named storms.

Energy

Trump pulls out emergency orders to bailout coal and nuclear. The Trump administration issued an emergency order for the Department of Energy to rescue coal and nuclear power plants, arguing they are needed for grid security. Coal and nuclear plants have been shuttering en masse as they have become increasingly unprofitable. The White House warns the aging plants are needed, although grid operators such as PJM have said there isn’t much evidence to support the notion that the closings are threatening grid reliability.

Banks raise oil price forecasts. A Wall Street Journal survey of 12 investment banks sees higher oil prices for 2018. The same banks raised their expected oil price forecast for the eight month in a row. The survey from May puts the average price for Brent from the 12 banks lands at $70 per barrel for this year, with WTI at $66. That is a massive upward revision of $6 per barrel from the same respondents in April. “The key driver here is basically supply risk—supply risks from Iran and Venezuela,” said Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, according to the WSJ.

Petrobras CEO resigns amid oil worker strikes. A series of strikes have brought the Brazilian economy to a standstill, forcing the CEO of Petrobras to resign. A trucker strike was followed by an oil workers’ strike, putting intense pressure on the Brazilian government to return to regulated fuel prices, which is bad news for the state-owned oil company if it has to shoulder the costs. Petrobras CEO Pedro Parente has been credited with turning the company around, cutting debt and putting the firm on a more sustainable path. But Brazilians are angry at high fuel prices and Parente agreed to step down.

Cryptocurrencies

Buy bitcoin while it’s still cheap. Bitcoin prices may have reached a low point, and investors should buy up the digital currency while they still can. "All cryptocurrencies are very cheap right now," Dan Morehead, founder of Pantera Capital Management, told CNBC. “It's much cheaper to buy now and participate in the rally as it goes," Morehead said. Bitcoin hit a bottom in April at about $6,800, and again at about $7,100 last week. Related: Immigrant-Founded Business Make Up 43% Of Fortune 500 Companies

Google bans Bitcoin, analysts see ulterior motives. In March, Google decided to ban all Bitcoin and other cryptocurrency advertisements on its platforms, a policy set to take effect this month. Facebook and Twitter have also done the same. But some analysts think the ban is wrongheaded and potentially problematic since these large tech companies have blockchain aspirations of their own. “I suspect the ban has been implemented to fit in with potential plans to introduce their own cryptocurrency to the market in the near future and therefore removing other crypto adverts allows them to do it on their own terms,” Phillip Nunn, CEO of Manchester-based investment firm Blackmore Group, told The Independent.

Qulian Technology raises $234 million in VC funds. Qulian Technology, a China-based blockchain platform developer, announced the completion of a $234 million Series B funding round, according to CoinDesk. It represents one of the largest sources of traditional funding for blockchain technology companies to date, CoinDesk says. The digital currency news outlet says that Robinhood’s $363 million round still leads the pack.

By Michael Kern for Safehaven.com

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