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China Is Ready For Trade War Escalation


Monday, August 6, 2018

Stocks mixed, dollar rises on trade tensions. The U.S. dollar gained at the start of the week after China said it would not back down in the unfolding trade war with the United States. China’s Global Times ran an op-ed stating that China was prepared for a “protracted war” and that the U.S. wants China to become an “economic vassal.” Late last week, China tried to cushion the blow to the yuan after a string of losses by making it more costly to short the currency. Stocks were choppy and mixed on Monday, although they are coming off of strong second quarter earnings from major corporates.

(Click to enlarge)

- Earlier this year, Latin American currencies were decimated, particularly in Argentina and Brazil. Argentina had to tap IMF funds to avoid a crisis.

- However, the Bloomberg/JPMorgan Latam FX Index has rallied over the past month.

- News reports suggest the NAFTA renegotiations are in their final stages, which has given a boost to Mexico’s peso.


“60-40” Chance of a no-deal Brexit. UK International Trade Secretary Liam Fox said that there was a “60-40” chance that the UK crashes out of the European Union without a deal. He blamed the “intransigence” of the European Commission, blaming them for obsessing over EU rules. The comments, along with the stumbling negotiations, add pressure to the UK government, which is scrambling as the March 2019 Brexit date approaches.

German manufacturing plunges 4 percent in June. Trade tension caused German manufacturing activity to fall by a rather significant 4 percent in June, compared to May, the result of a decline in new orders from non-Eurozone countries. The month encompassed a heated period between the U.S. and Europe over trade. “Disappointing new orders data show tentative signs of trade tensions hitting the German economy, which doesn’t bode well for the industrial outlook in the second half of the year,” Carsten Brzeski, chief economist at ING Germany, told the FT. Related: Bitcoin vs. Gold: Which Is Better Off As Trade Wars Escalate?

Turkish lira plunges to record low on sanctions. Turkey’s lira fell to a record low after the Trump administration said it was reviewing Turkey’s duty-free access to the U.S. market, according to Reuters. The move comes after Turkey put retaliatory tariffs on U.S. goods, in response to U.S. tariffs on imported steel and aluminum from Turkey. However, the fight has escalated dramatically over Turkey’s jailing of an American pastor. The U.S. froze the assets of the Turkish interior and justice ministers last week, and Turkey responded by announcing the freezing of assets of the American counterparts. The move was symbolic but Turkey’s currency has fallen to a record low against the dollar, and the lira has fallen by 27 percent so far this year.


Iranians hoard gold. Gold prices in Iran have shot up to record highs as Iranians hoard the precious metal amid fears of U.S. sanctions. U.S. sanctions on Iran’s currency and its automotive industry took effect on August 4, which also include sanctions on dealings in precious metals in Iran. The Wall Street Journal reports that Iranians are rushing to convert their savings into gold to avoid losing their nest eggs. Demand for gold bars apparently tripled in Iran in the second quarter.   

Speculators continue to short gold. Gold speculators increased their short positions for a seventh consecutive week last week, while also cutting their long bets. It is the second longest short-building streak on record. “The gold price is unlikely to recover in any serious fashion for as long as the headwind persists from this side. However, if extensive covering of short positions were to ensue, we believe this would serve as a springboard for the gold price,” Commerzbank said in a note.

Copper dips again. Copper prices dipped at the start of the week on concerns about the escalating trade war between the U.S. and China. China unveiled new tariffs on over 5,000 goods from the U.S. Still, China is the world’s largest consumer of industrial metals, and demand still looks healthy. “Grid spending has normalised,” analysts at Bank of America Merrill Lynch said in a note. “Higher outlays from utilities are particularly supportive this time around because the investment focus has shifted from aluminum-intensive power transmission to copper-intensive distribution networks.”              


Oil prices rise on Saudi production cuts. After reportedly having trouble finding buyers for its oil at its desired price, Saudi Arabia apparently cut production. “The Saudis are sending clear signals on their desired price range,” Mike Wittner, head of oil market research at Societe Generale SA, told Bloomberg. “When the concern was prices getting too low, they unexpectedly trimmed output.” The move is a sign that Saudi Arabia plans on putting a floor beneath prices to ensure they don’t drop too low.

China proposes tariff on U.S. LNG. China proposed a 25 percent tariff on U.S. LNG imports as part of the next phase of trade war escalation. China is expected to be the largest growth market for LNG for the foreseeable future, and several LNG exporters in the U.S. have China at the forefront of their business plans. Still, it is unclear how much of an impact tariffs will have since LNG cargoes can simply be rerouted elsewhere, although, the spot market is not as well-developed as the market for crude oil.

Related: U.S.-Turkey Tensions Take A Dangerous Turn

Oil could surpass $90. Oil prices could rise above $90 per barrel later this year, according to Amrita Sen of Energy Aspects. She told CNBC that about 500,000 bpd of Iranian supply could be lost in the third quarter, compared to Iran’s peak in output in April. But the critical deadline will be in November when oil sanctions kick in. By the end of the year, Iran could lose 1.2 to 1.5 million barrels of oil per day. Heading into the fourth quarter Sen says that oil could go well into the upper $80s per barrel and potentially even $90, but that the crucial variable will be how much Iranian supply goes offline.


WePower: Blockchain to make energy trade more efficient. Blockchain technology will allow for a more liquid trade in energy, and allow developers to raise capital much more efficiently. WePower, a Lithuania-based blockchain company, has developed a platform that will allow for trading tokens in renewable energy. In November, the company will launch an auction for 300 megawatts of solar in Spain, and the tokens will be sold at a 20 percent discount to market prices, according to Bloomberg New Energy Finance.

Massive “wrong-way bet” on Bitcoin. An unidentified futures trader made “a massive wrong-way bet on Bitcoin,” according to Bloomberg, which meant that payments to counterparties couldn’t be paid. The Hong Kong exchange OKEx tried to liquidate a $416 million long position on the Bitcoin futures last week, but was unable to do so. The “episode underscores the risks of trading on lightly regulated virtual currency venues,” Bloomberg noted.

WSJ: Traders talking up and dumping cryptocurrencies. A Wall Street Journal analysis finds that some cryptocurrency traders are talking up digital currencies, helping to drive up their price, then dumping them. The practice has reportedly generated at least $825 million for successful traders over the past six months, while dealing steep losses to others caught on the wrong side. The WSJ identified 175 “pump and dump” schemes involving 121 different cryptocurrencies.

By Josh Owens for Safehaven.com

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