Monday, September 24, 2018
Markets down on economic fears. U.S. stocks dipped at the start of the week as trade tariffs took effect and Brent oil prices surpassed $80 per barrel. In the U.S., the week is shaping up to be one of political turmoil with the Supreme Court nomination on the rocks, while the deputy attorney general – at the time of this writing – appeared to be heading out the door, with uncertain ramifications for the Mueller investigation. Meanwhile, the Bank of International Settlements warned that the global economy is looking shaky and many central banks lack the tools to address another downturn 10 years after the financial crisis.
Chart Of The Week
(Click to enlarge)
- Barrick Gold (NYSE: ABX) announced a decision to buy Randgold Resources (NASDAQ: GOLD) for $18.3 billion, and the attraction to Randgold was obvious.
- The grade of metal in the world’s gold reserves has been in decline for years, as Bloomberg notes, down from an average of 10 grams per metric ton in the 1960s. Many operators have reserves at a tenth of that level, running up against the limits of profitability.
- Barrick’s reserves have a grade of 1.55 grams per metric ton, while Randgold has 3.79 grams per metric ton, so the acquisition will improve Barrick’s reserve base. Related: Debunking The A.I. Productivity Myth
Markets
Markets lower as $200 billion in tariffs take effect. The $200 billion in U.S. tariffs on imports from China took effect today, along with the $60 billion in retaliatory tariffs on U.S. goods heading to China. Trade talks have broken down yet again with little sign of progress. Stock markets opened up a bit lower on Monday. Large retail chains including Walmart (NYSE: WMT), Target (NYSE: TGT) and J.C. Penney (NYSE: JCP) have said that prices will go up on a wide array of retail products because of the tariffs.
U.S. overconfidence threatens “miscalculation.” JPMorgan said in a note that overconfidence from U.S. President Trump opens up the possibility of a “major miscalculation” in which the U.S. takes an aggressive position on multiple fronts, including NAFTA, auto tariffs, China and Iran. Oil supply outages from Iran could push oil prices up higher, and a third round of tariffs on China could cut into corporate earnings. “The deeper question is whether this week’s rallies are the beginning of an unmissable strategic opportunity (lasting six months or more, delivering at least 10% upside) or just a more tactical one (lasting another week or two, delivering about 5% upside)?,” JPMorgan strategists wrote. “Across research teams, conviction is higher around the latter than the former.”
Trade war helping China’s competitiveness. The Wall Street Journal writes that the U.S.-China trade war is forcing Chinese companies to become more competitive, pushing them to manufacture higher-end products to compete against American goods. One company profiled by WSJ is using more robots and automation in its manufacturing facilities, while shifting low-skilled work to other parts of Asia. “It’s helping China be more competitive down the road,” one Chinese executive told the WSJ.
Commodities
Barrick Gold buys Randgold Resources for $18.3 billion. Barrick Gold (NYSE: ABX) announced a decision to buy Randgold Resources (NASDAQ: GOLD) for US$18.3 billion, a move that will create the world’s largest gold company by value and output. According to the Financial Post, the consolidated company will own five of the world’s top ten lowest cost gold mines in the world.
Goldman Sachs: Commodities still a bullish trade. The U.S.-China trade war, currency turmoil and fears of economic deterioration have rattled commodity markets, but Goldman Sachs says commodities are still a strong bullish bet. Physical supply shortages and geopolitical risk will help outweigh the dampening impact of a strong dollar, the investment bank argues. Backwardation in the forward curve also suggest more destocking in inventories ahead, with bullish implications.
Copper prices rally. Copper prices surged last week after investors viewed the latest round of U.S.-China tariffs as less damaging than once feared. On Friday, copper jumped by more than 4 percent, the strongest single-day gain in 18 months. Last week was also the strongest week for copper in two years. Strong economic data from both the U.S. and China have eased concerns about a downturn. “Improving demand, underlined by sharply increasing Chinese premia and declining stocks, provides a strong fundamental rationale for higher prices, while stretched speculative positioning looks susceptible to a short covering rally,” Barclays analyst Ian Littlewood said of the downturn in copper over the past few months.
Energy
Oil prices rise on no OPEC+ action. Over the weekend, OPEC+ announced no further action to add barrels to the market, arguing that the world is well supplied with oil. WTI rose above $70 and Brent is above $80 on the news, as investors seem to be betting that the market continues to tighten. “It is now increasingly evident, that in the face of producers reluctant to raise output, the market will be confronted with supply gaps in the next three-six months that it will need to resolve through higher oil prices,” BNP Paribas oil strategist Harry Tchilinguirian told Reuters Global Oil Forum.
U.S. potentially looking at Venezuela sanctions. On Friday, U.S. Secretary of State Mike Pompeo said that stiffer sanctions on Venezuela could be in the offing. “I think you'll see in the coming days, a series of actions that continue to increase the pressure level against the Venezuelan leadership - folks who are working directly against the best interests of the Venezuelan people,” Pompeo said in an interview with Fox News. The measures may not go as far as a ban on Venezuelan oil imports into the U.S., but could consist of a ban on U.S. light oil exports to Venezuela. The end result would be a steeper decline in Venezuelan oil production.
Oil analysts see odds of $100 oil rising. The supply losses from Iran are tightening the oil market and the reluctance of OPEC+ to boost production increases the likelihood of $100 oil, a growing number of analysts say. “The market does not have the supply response for a potential disappearance of 2 million barrels a day in the fourth quarter,” Mercuria Energy Group Ltd. co-founder Daniel Jaeggi said in a speech at the S&P Global Platts Asia Pacific Petroleum Conference. “In my view, that makes it conceivable to see a price spike north of $100 a barrel.”
Cryptocurrencies
Cryptocurrencies rose last week, but rally fizzled. Cryptocurrencies rallied last week on news that Ripple Labs Inc. has plans for using the digital currency, which would let financial companies speed up money transfers into emerging markets using Ripple. The news lifted all cryptocurrencies, a trend that has become increasingly common – cryptos rise and fall together based on the industry’s collective outlook. The mini-rally fizzled on Friday, with major coins falling back. Related: Hacks, Bugs And Exploits: Growing Pains For The $4 Billion Blockchain
Juventus offers fan token. The top Italian soccer team, Juventus, announced on September 24 that it would launch its own cryptocurrency “fan token,” which would be a “blockchain-based fan engagement platform.” The move comes two weeks after a similar announcement from Paris Saint-Germain, France’s top club. According to the press release, the token “will allow the club’s fans across the world to interact through a mobile voting and polling platform that will allow our supporters’ voices to be heard, and create a personal connection between the club and its fans.”
IBM Report: U.S. Government should lead on blockchain development. A new report from IBM, which summarizes the results of a series of roundtable meetings with U.S. lawmakers, says that the U.S. should lead on blockchain technology development. “[S]trong industry consensus exists around the belief that blockchain technology will be the leading edge of 'next Internet' economy,” the report said. The report came to three overarching conclusions – that there needs to be “leadership and vision from the government,” that there should be “close collaboration between industry and government,” and that there must be “increased research and test-bed deployments.”
By Josh Owens of Safehaven.com
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