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Can Markets Resist Growing Geopolitical Tensions?


Monday, July 23, 2018

Trump threatens Iran; big week for earnings. President Trump issued a threat to Iran on twitter, in all caps, warning Tehran that it would “SUFFER CONSEQUENCES.” Meanwhile, a slew of corporate earnings from the second quarter will come out this week, which should offer clues into the health of the global economy. Corporate earnings are showing signs of ongoing strength, but the effects of the trade war, currency volatility and a potential economic slowdown are expected to weigh on markets in the second half of the year.

- China’s currency has been declining for about six weeks, and the depreciation is raising some red flags.

- In 2015, a sudden depreciation of the yuan led to wild swings and a steep selloff in China’s stock market, which sent shockwaves around the world.

- The fallout from the latest drop in the yuan is smaller, and analysts say that is because there is more clarity about the causes this time around. The U.S. Fed is tightening rates while China’s central bank is trying to loosen its grip on its currency.

- “The currency should be depreciating from a broad macro perspective -- you have the Fed hiking and PBOC easing, so at some point it will be reflected in the FX market,” Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong, told Bloomberg Television. “This is still in line with the broader PBOC policy of introducing more volatility and letting the market play itself out.”


Trump complains about Chinese currency. President Trump has criticized China for weakening its currency even as his trade war against Beijing has put downward pressure on the yuan. Trump also questioned the rate tightening from the U.S. Federal Reserve. “I’m not thrilled,” Trump said in a CNBC interview. “Because we go up and every time you go up they want to raise rates again. I don't really — I am not happy about it. But at the same time I’m letting them do what they feel is best.” The President also said that he was willing to slap $500 billion of tariffs on imports from China, which would essentially cover the entirety of imports from China. Related: U.S. Treasury Yields Could Be About To Break Out

Stocks fluctuate on growth fears. The G20 held a summit this past weekend, and the top finance ministers from the largest economies in the world agreed that economic activity remains robust but that risks to the global economy are growing, a conclusion echoed by the IMF just days earlier. Stocks struggled out of the gates on Monday, weighed down by geopolitical concerns as the U.S.-Iran conflict appeared to escalate and the U.S.-China trade war shows no signs of slowing down.

Market volatility appears to be on the rise. The trade war has obviously loomed over the financial markets for some time, but a growing number of market risks are pushing up volatility. Currency fluctuations, rising interest rates and an economic recovery that has run longer than the historical norm is fueling speculation about a rocky road ahead. August also tends to be a slower month in terms of market trading volume, which could exaggerate volatility in the next few weeks.  “You have a lot of geopolitical events that could happen this summer,” Barbara Reinhard of Voya Asset Management told Bloomberg. “August ones are particularly alarming -- that’s when volumes are thin and people are on vacation.”


Second quarter earnings start rolling in. A range of commodity producers will start reporting second quarter earnings this week, including giants such as Anglo American (LON: AAL), Freeport McMoRan (NYSE: FCX), the largest publicly-traded copper miner, as well as gold producers Barrick (NYSE: ABX) and Newmont Mining (NYSE: NEM). As Bloomberg writes, “investors will be looking for clues on how miners are managing costs and their progress in paring debt.”

Copper a long-term buying opportunity. Citibank says that copper’s slump has opened up a long-term buying opportunity. “Prepare for a decade of Dr. Copper on steroids,” Citi analysts including Max Layton and Tracy Liao wrote in a July 17 note. The analysts project copper prices to rise from about $6,100 per metric ton currently to $8,000 by 2022 and $9,000 by 2028. Citi says that copper is becoming more expensive and difficult to mine, which should push prices up over time.

Alcoa Corp. hit by aluminum tariffs. The Trump administration’s steel and aluminum tariffs are intended to help revive U.S. manufacturing, but the tariffs are hitting the U.S.’ largest aluminum producer. Alcoa Corp. (NYSE: AA) was forced to lower its expected profits this year because of the tariffs, which CEO Roy Harvey calls a significant “headwind.” Alcoa produces about 28 percent of its aluminum in Canada, which means it has to pay tariffs when it moves that product into the U.S.


Iran and Trump trade threats. Iran’s president warned President Trump not to block Iranian oil exports. Trump responded on Twitter in all caps saying that Iran would “SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE.” Oil prices posted strong gains in early trading on Monday.

Tesla asks for refunds from suppliers, sign of cash trouble. Tesla (NASDAQ: TSLA) has reportedly asked some suppliers to refund some of what the car company has already spent previously, a move that suggests Tesla has running into financial trouble. Tesla described the request as critical to its continued operation, raising further questions about the health of the company after it has suffered significant delays in the ramp up of production of its Model 3.

Related: Iraq Unplugged: No Internet, No Protests, No Money

US Congress weighs Russia sanctions, oil companies oppose. The U.S. Senate is considering a bill that would allow for the swift implementation of sanctions on Russia if the latter meddles in future U.S. elections. However, the bill is opposed by the oil and gas industry, although it is unclear which specific companies are lobbying against the measure. ExxonMobil (NYSE: XOM) had to withdraw from Russia in 2014 after sweeping U.S. sanctions following the annexation of Crimea.


Bitcoin jumps above $7,500. Bitcoin prices moved up on Monday, trading just below $7,700 in early trading. News about hacking, fraud and a regulatory crackdown have battered Bitcoin and other digital currencies in the past few months. However, Bitcoin is above its 50-day moving average and is close to a two-month high. The recent G-20 meeting, which produced vague statements about cryptocurrencies lacking the attributes of sovereign currencies, without offering details on how to regulate them, may have boosted confidence in Bitcoin.

Report: Blockchain can reduce costs of solar, EVs and other renewable energy. Blockchain can help reduce risks and costs for energy technologies, according to a new report from the Energy Futures Initiative. Blockchain can verify transactions safely and securely, and has the potential to cut costs for administration, clearinghouses, data sharing, among other applications. The report says that between $100 million and $300 million has been invested in energy-sector blockchain technologies thus far.

EU warns about future of cryptocurrencies. A report published by the European Parliament said that the future of Bitcoin and other cryptocurrencies would be at risk if central banks developed their own digital coinage. “The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors,” the report concluded. “However, the market power of banks in traditional banking services might be used to limit competition in the cryptocurrency market through pre-emptive acquisitions or predatory pricing schemes.”

By Josh Owens for Safehaven.com

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