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Commodities And Equities Hit Hard In Fresh Round Of Tariffs

City

Monday, June 18, 2018

Trade war reignites. The Trump administration decided to move forward with $34 billion in tariffs on China, part of the $50 billion tariff package originally announced months ago. They will take effect in three weeks, and the other $16 billion will be reviewed. China announced a corresponding $34 billion in tariffs on U.S. goods, including soy, beef, pork, poultry and automobiles. U.S. trade officials said it would respond to China’s retaliation with more restrictions on investment, with another round of deeper tariffs potentially to follow. In other words, the tit-for-tat measures mean that a trade war is all but certain, although the extent of the damage remains to be seen. So far, global financial markets appear somewhat rattled but far from panicked.

Chart of the Week

(Click to enlarge)

- Bitcoin’s prices has fallen by more than 60 percent since hitting a peak in the fourth quarter of 2017. Bloomberg says “it’s an unraveling almost on par with the NASDAQ index during the dot-com bust, or U.S. bank equities in the financial crisis.”

- The cryptocurrency has been the victim of a variety of maladies, including fears of regulation, scams, and overhyped expectations. Hacks and scams alone cost somewhere around $670 million in a single quarter.

- Still, Bitcoin believers say with prices beaten down so much, the digital currency is bound to rebound and that now is a unique opportunity for buyers.

Markets

ECB to end bond buying. The European Central Bank said last week that it would end its bond-buying program by the end of 2018. The extraordinary intervention, which has lasted more than three years, was aimed at staving off deflation and also tamping down fears of a debt crisis by keeping sovereign interest rates low. The ECB was clear that its withdrawal of monetary stimulus will be slow and careful, and it also promised to step back in if conditions deteriorate.

Trade war puts equities, commodities in red. Global stocks started off on a downbeat note on Monday on fears of the U.S.-China trade war. “Trade continues to weigh on the market and the China tariffs are a big deal,” Lindsey Bell, investment strategist at CFRA Research, told the WSJ. “It could get worse before it gets better.” However, perhaps because of the confusion over the back-and-forth from the Trump administration on trade policy, combined with expectations that the two countries will continue negotiating, global equities haven’t yet suffered a serious selloff. Related: Stock Markets Open Lower On Renewed Trade War Fears

Corporate earnings slow in a test to global economy. U.S. corporate earnings are set to slow down after more than a year of strong growth. In the first quarter, U.S. corporations saw profits grow by an astounding 25 percent, the fastest rate in eight years. That is expected to slow to 19 percent in the second quarter, 21 percent in the third, and 17 percent in the fourth. Rising interest rates, higher energy costs and more tepid profit growth from U.S. corporations could pose a test to the global economy.

Commodities

Bullish bets on gold rise just ahead of Fed hikes. Hedge funds and money managers hiked their bullish bets on gold to the highest level in seven weeks a day before the Fed surprised the market with a more aggressive guidance on rate increases. Gold fell as a result, dealing losses to investors. The U.S.-China trade war has failed to boost gold prices. It seems that the stronger dollar and the prospect of multiple rate hikes over the next few years is keeping gold in the doldrums.

Panasonic to triple cobalt use. Panasonic Corp. (OTCMKTS: PCRFY) laid out plans to more than triple its cobalt consumption over the next five years, a surprise move given the company’s aim to phase out cobalt in automotive batteries. Panasonic is the exclusive battery cell supplier for Tesla (NASDAQ: TSLA). Panasonic hopes to phase out the use of cobalt, but analysts see cobalt-free batteries as many years away.

Cobalt demand to grow 14.5 percent annually through 2027. Demand for lithium-ion batteries used in electric vehicles will keep cobalt demand soaring for the foreseeable future. According to Roskill, cobalt demand will rise by 14.5 percent per year through 2027. That could mean the size of the market will more than double over the next decade. Prices will remain elevated on soaring demand, but that will also spark more investment in supply.

Energy                  

Investors turn bullish on crude oil. After about two months of growing bearish sentiment, investors seem to think the tide is turning again. Hedge funds and other money managers had trimmed their net-long positions without interruption since April, but last week investors turned bullish again, perhaps sensing that the price correction had run its course. It remains to be seen if these bets will pay off; the past few trading days have seen oil prices fall back on solidifying expectations of an oil production increase from the OPEC+ meeting. The specifics will matter – if OPEC+ chooses a more restrained increase, prices could rise significantly. “Traders are uncertain about how broad these production increases will be. It’s hard to trust the numbers, especially when Saudi Arabia was recently talking about $85-$100 oil being pleasing to them,” said John Kilduff, a partner at Again Capital LLC.

Oil sands industry: Canada is closed for business. The inability for Canada to move forward with a major oil pipeline poses a threat to the long-term growth of Canada’s oil sands. According to the Canadian Association of Petroleum Producers (CAPP), Canada's oil production is expected to rise by 1.4 million barrels per day (mb/d) to 5.6 million mb/d by 2035, with 4.2 mb/d coming from oil sands. However, that level of growth is predicated on an expansion of midstream capacity, namely, the Keystone XL, Trans Mountain Expansion, or the lesser known Line 3 Replacement. CAPP says global competition for capital investment "is fierce and Canada is losing" because of a "lack of regulatory clarity, and the inability to see federally-approved pipelines get built." The pipeline woes send the signal that Canada is "closed for business."

Strong dollar and high oil prices putting pressure on emerging markets. The strong U.S. dollar and higher fuel prices are a double-whammy for emerging markets, with the strength of the greenback exacerbating the price at the pump. The recent protests in Brazil were largely the result of discontent after a painful spike in fuel prices. Also, UBS says $75 oil would result in global inflation by a half percentage point relative to $50 oil.

Cryptocurrencies

Poll: U.S. adults see Bitcoin as investment, not payments system. A large portion of U.S. adults view Bitcoin and other cryptocurrencies as investment vehicles, not necessarily an alternative currency or a payments system. As such, they favor regulatory oversight over the market. The poll, aimed at high earners, finds that U.S. investors are increasingly looking at cryptocurrencies for their investment portfolios.

Related: Should Investors Start Lining Up For North Korea?

Technicals point to Bitcoin weakness. Bitcoin is flirting with resistance levels, putting the cryptocurrency in danger of a deeper slide. Bitcoin dipped below $6,300 last week, raising fears of a further slide. Prices have somewhat rebounded, but the currency has been trending down since early May. The technical analysis looks bearish.

BIS: Cryptocurrencies are not scalable. The Bank for International Settlements (BIS) said in a report that cryptocurrencies suffer from a “range of shortcomings.” BIS, often referred to as the central bank of central banks, said that cryptocurrencies are not scalable and are subject to too much fraud and manipulation. It also said the decentralized nature of digital currencies is a fundamental flaw, not a feature.

By Josh Owens for Safehaven.com

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