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China Scrambles To Inject Liquidity Into Markets

Bubble

Monday, October 8, 2018

Global equities down on market uncertainty. Chinese authorities are clearly worried about their slowing economic growth. In recent months, China has downgraded its campaign to slash debt and the government has stepped up spending on infrastructure. But over the weekend, the central bank cut the minimum volume of cash reserves that banks are required to sit on, a move that could inject as much as $175 billion into the economy. While the monetary stimulus could bolster growth, it also symbolizes the growing concerns in Beijing about the trajectory of the economy. The announcement from China, combined with renewed eurozone concerns, dragged down equities at the start of the week.

(Click to enlarge)

- Brazil’s currency, the real, has been hammered this year. However, over the past month, the real has regained some lost ground (see chart above, USD:BRL).

- The real has gained more than 10 percent over the past month, strengthening from 4.21 reais per dollar in mid-September, to 3.74 reais as of Monday.

- The real gained more than 2 percent after the election on Sunday, as major investors seemed to interpret the strong performance of far-right candidate Jair Bolsonaro as a positive for the country’s finances.

Markets

Italian bond yields hit four-year high. 10-year bond yields in Italy rose to four-year highs as the government has dismissed concerns about its deficits. Italian Prime Minister Matteo Salvini said that the real enemy of Europe is austerity and the open borders policies from Brussels. “If neither the EU or Italy back down, yields will continue to climb higher from here,” said Jens Peter Sorensen, chief analyst at Danske Bank A/S, according to Bloomberg.

Global stocks fall. Rising bond yields and a selloff in China dragged down global stocks at the start of the week. “Bonds matter again,” Terry Sandven, strategist at U.S. Bank Wealth Management told the Wall Street Journal. “The overall economy is going well and the bond market is reflecting it,” he said, before adding: “That, though, also means more pressure for stocks.” China’s stock market fell on Monday after the central bank cut the amount of cash reserves that banks have to hold in an effort to spur growth. Related: ‘Spy Chips’ Add To Trade War Worries

Brazil’s first round election shows strength of far-right. The far-right candidate Jair Bolsonaro performed much better than expected in the first round of Brazil’s presidential election, raising the odds of his victory later this month. His social views are to the far-right and his anti-democratic platform has divided Brazil, but his economic policies are expected to be more orthodox. Brazilian equities and Brazil-focused ETFs rose on the news.

Commodities

Gold falls again. The uptick in the dollar and the rise in treasury yields has pushed gold down to about $1,200 per ounce. A strong jobs reports from the U.S. continues to bolster the case for the Fed to tighten interest rates, creating headwinds for gold. In the physical market, India has shown strong demand, but it could be temporary. India also imported large quantities of gold in September, which we attribute to the previously low prices and ongoing festival season,” Commerzbank said in a note. “The import dynamism may abate again soon, however, as gold in Indian rupees has become considerably more expensive since mid-August.”

Aluminum market sees volatility as major plant faces trouble. The aluminum market received a jolt on news that the world’s largest alumina refinery faced the possibility of a shutdown. Norsk Hydro’s Alunorte refinery in Brazil was under pressure to idle operations because of legal troubles and the inability to process waste, and prices jumped on the news. It has been operating at 50 percent capacity since February. Last week, it was on the verge of a complete shutdown, but over the weekend the plant received a waiver from Brazilian regulators to continue to operate at 50 percent capacity.

Commodities not a good bet in short-term. Dollar strength will be a major barrier to investors looking to make a profit in commodities. The Fed is expected to hike interest rates one more time before the end of the year. “We think the trend is soft heading into year-end. Agriculture and metals are both under pressure,” said Rob Haworth, senior investment strategist with U.S. Bank Wealth Management, according to the Wall Street Journal. “The real problem is that the dollar will continue to be a headwind.”               

Energy   

Oil sinks on potential Iran waivers. Oil prices dropped late last week and in early trading on Monday on rising expectations that the U.S. would grant some waivers to countries buying oil from Iran. If the State Department relented, that could keep Iranian oil exports from falling to zero. Reuters reports that at least two companies in India have already secured some imports from Iran for November, perhaps as much as 300,000 bpd, after the U.S. sanctions take effect. “One way or another, it looks as though India is going to take some Iranian crude,” Olivier Jakob of Petromatrix told Reuters. That could force oil to “retrace some of the price surge we saw last week.”

Saudi Arabia assures U.S. that Iranian supply is offset. Saudi crown prince Mohammed Bin Salman said in an interview last week that the market should not worry about lost supply from Iran. “The request that America made to Saudi Arabia and other OPEC countries is to be sure that if there is any loss of supply from Iran, that we will supply that,” MbS said in a Bloomberg interview. “And that happened.” He claimed that Saudi Arabia has more than offset the declines from Iran. “We export as much as two barrels for any barrel that disappeared from Iran recently,” he said. “So we did our job and more.”

Related: America's Trillion Dollar Credit Card Crisis

Iran questions Saudi claims, says market facing “severe shortage.” Iran’s oil minister dismissed the claims by the Saudi crown prince that Saudi Arabia is supplying two barrels for every lost Iranian barrel, and suggested that the oil market would continue to tighten. “Such brags would only satisfy Mr. Trump but the market would never buy such a claim,” Iranian oil minister Bijan Zanganeh said. He said that higher output from Saudi Arabia was merely the result of the Saudis dipping into their storage, not from higher production. “The market and rising prices are the best evidence of concern that the market is in short supply and is rightly nervous about the severe shortage of oil in the coming months,” he added.

Cryptocurrencies

Seoul mayor calls for $108 million for a blockchain city. The mayor of Seoul, Park Won-soon, unveiled a five-year plan to invest $108 million into the South Korean capital in order to transform it into a smart city powered by blockchain technology. His Blockchain Urban Plan for 2018–2022 calls for 14 public services to be based on blockchain technologies, including labor welfare, vehicle management, certification issuance, and even voting.

U.S. Senate looks at tighter sanctions on Venezuela’s petro. The U.S. has tried to step up the pressure on Venezuelan President Nicolas Maduro, and a bipartisan group of Senators are looking at a bill that would tighten sanctions on Venezuela’s cryptocurrency, the petro. The bill would largely codify an existing executive order issued by President Trump that imposes sanctions on the petro. The bill would also go farther than the executive order by barring U.S. citizens from providing software to the Venezuelan government related to the petro.

Bitcoin volatility falls to lowest level of the year. Bitcoin prices have been abnormally quiet in recent weeks, trading within a relatively narrow range. “Both BTC volatility and spread between high and low prices at 30 min intervals are at year-to-date lows,” noted Eric Ervin, CEO of Blockforce Capital. He added that this “volatility has been trending downward since the middle of September, with the average volatility reading today (0.404) being the lowest its been all year.” Many experts think that the market is in a “wait and see” mode, according to Forbes.

By Josh Owens for Safehaven.com

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