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Asia Turmoil Shakes Up Equities Markets Ahead Of Mid-Terms

China

Monday, November 5, 2018

Stocks flat after Asia volatility and big political week in U.S. U.S. and European stocks opened flat on Monday after a sharp decline in equities in Asia. Expectations of a trade breakthrough have been tempered after U.S. economic adviser Larry Kudlow dialed back rhetoric about a deal last week, which was followed by stern comments from China’s president Xi Jingping on Monday. Meanwhile, all eyes are on the U.S. mid-term elections on Tuesday, which could have a profound impact on the trajectory of the Trump presidency and the U.S. economy.

Chart of the Week

(Click to enlarge)

- The MSCI Emerging Markets index began to stage a rebound at the end of October, just as U.S. stocks ran into trouble.

- Emerging markets have been battered for much of this year but jumped over the last week. Relative to the S&P 500, the EM index is at its highest point since August.

- It is not clear if EM assets are rebounding in a sustainable way, but there is some hope that EM markets have bottomed out.

Markets

Asian stocks plunge. Monday saw a steep selloff in stocks in Asia after remarks from Chinese President Xi Jingping reduced hopes for a breakthrough on trade (more below). Also, data on China’s service sector fell to a 13-month low, raising more fears of a slowdown in China. The Nikkei Asia300 Index declined 1.6 percent.

China stands firm on trade. Recent reports suggest that the Trump administration is eager to reach a deal with China on trade as the U.S. stock market has suffered from several weeks of volatility and the effects of the trade war continue to mount. China’s Xi Jingping gave a highly-anticipated speech at the Shanghai trade fair on Monday, and didn’t offer any major concessions. Although not by name, he seemed to denounce Trump and the “law of the jungle” trade approach from Washington. Asian stocks fell after the speech, with the markets seemingly downgrading the odds of a breakthrough on trade. Related: China Mints Two Billionaires Every Week

U.S. bond selloff ahead of mid-term elections. Political risk is scaring away holders of U.S. bonds. A combination of other factor are also causing some turmoil, including volatility in equity markets, confusion of the U.S.-China trade war, a record bond auction and an upcoming rate decision from the Federal Reserve. The benchmark rate is near a seven-year high as investors dump treasuries. “It’s a sell-strength market in bonds,” said Brian Edmonds, head of interest-rate trading at Cantor Fitzgerald, according to Bloomberg. “We know we are pushing up the size of every auction. So that all matters.”

Commodities

U.S. soybeans sit and wait. As the New York Times reports, major U.S. soybean producers are piling up their harvest as they await a resolution in the trade war with China. Chinese tariffs on U.S. agricultural products has led to a steep drop in purchases from China. U.S. soybean farmers are sitting on mountains of soybeans hoping that they will be able to sell their product before it rots. China is the largest consumer of soybeans in the world and half of U.S. soybean exports went to China last year.

U.S. soybean acreage to fall. The crash in soybean prices because of trade tariffs are pushing farmers into lowering their plantings for next year. “Even the USDA now believes that planting soybeans will be less attractive for US farmers,” Commerzbank said in a note. In 2019, “soybean acreage will be down by 7.4%. By contrast, the corn acreage and wheat acreage are set to grow by 3.3% and 6.7% respectively.” Even if the trade dispute is resolved in the near-term, some U.S. farmers are worried they have permanently lost market share in China.

Metals flat after strong week. Copper gained more than 3 percent last week, but metals prices are “subdued” at the start of this week, according to Commerzbank. “Weak Asian stock markets are weighing on sentiment with the result that almost all metals prices are down,” the investment bank said in a note on Monday. For copper, the rally over the past month may have been due to investors shedding short positions. If the trade war can be resolved – with lots of pressure on the Trump-Xi meeting later this month – metals prices could “climb noticeably.”            

Energy      

U.S. sanctions on Iran take effect. U.S. sanctions on Iran took effect on Monday, but Washington has granted waivers to eight countries to allow them to continue to import oil from Iran so long as they steadily reduce those purchases. The countries were not specified at the time of this writing, but could include India, China, South Korea, Turkey, Italy and Japan. Iran said it would “sell its oil and break sanctions” in response. “This is an economic war against Iran but... We are prepared to resist any pressure,” Iran’s president Hassan Rouhani said.

Venezuela running out of fuel. Venezuela’s PDVSA is quickly running out of gasoline. Around 80 percent of the 2,700 service stations in the country had to suspend fuel sales until further notice, according to Argus Media. “Venezuela could be completely out of gasoline and diesel for vehicles in as little as a week,” one official told Argus. PDVSA’s refineries are barley operating, forcing it to import more gasoline and diesel. PDVSA is exporting crude oil in order to pay debts and fund the government, but the lack of oil for domestic refining has translated into a dwindling supply of refined fuels.

Related: MIT Invests $1 Billion In Artificial Intelligence

Ballot measures up for a vote on Tuesday. Voters will decide on a series of ballot measures on Tuesday that could have wide-ranging effects on the oil and gas industry. In Washington State, voters will consider a carbon tax. In Colorado, they will decide on greater setback distances for oil and gas operations, which could curtail drilling in the state. In Missouri, Utah and California, they will decide the fate of retail gasoline taxes.

Cryptocurrencies

Nevada cryptocurrency intrigue. A cryptocurrency millionaire wants to build an experimental community based on blockchain technology in Nevada. Jeffrey Berns, through his company, Blockchains LLC, bought up a vast tract of land in Nevada’s high desert plateau. The acreage is near Tesla’s (NASDAQ: TSLA) gigafactory, and Berns has hyped his vision of a blockchain-based technology community that could demonstrate the power of blockchain, giving power to individuals to control their own data. Construction on the land won’t begin until late 2019 at the earliest.

ICO data is hard to pin down. Disclosure standards are still shifting in the world of initial coin offerings (ICOs), so precisely how much money has been raised from ICOs, as well as how much has been lost over the past year, is difficult to gauge. “At the end of the day, there’s no way to really agree on the information based on provable facts,” Alex Buelau, co-founder of Oxford, U.K.-based listing site CoinSchedule, told Bloomberg. “It’s early days. The question is how can the industry create an incentive for these guys to report accurate numbers? At this point there’s no incentive.”

Is Bitcoin a bubble? There has been a lot of handwringing about the skyrocketing price of Bitcoin and other cryptocurrencies last year, which was followed by a steep crash. To many critics, that was evidence of a cryptocurrency bubble. However, Bitcoin Exchange Guide offers 10 reasons why digital tokens are not a bubble.

By Josh Owens for Safehaven.com

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