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China’s Souring Economy Drags Down Global Equities

China

Monday, January 14, 2019

Stocks fall on China data. China released new data that suggests the economy is sliding deeper into a slowdown. The data dragged down stocks in Europe and Asia, and also led U.S. equities lower at the start of trading on Monday. Meanwhile, the U.S. government shutdown continues and the UK is set for a key vote in parliament on Tuesday on the Brexit package.

Chart Of The Week

(Click to enlarge)

- Global markets have soured on the news from China that both imports and exports declined.

- In mid-2018, companies accelerated shipments of goods to and from the U.S. and China, trying to get ahead of tariffs. That “front-loading” kept trade aloft for several months.

- However, after those shipments were completed, trade volumes began to sag, culminating in a very negative report in December (more on that below). 

- China’s imports and exports are also down because of a broader slowdown in economic growth.

Markets

Emerging market rally? Since bottoming out last summer, emerging markets are starting to look like an exciting bet. The softer tone from the U.S. Federal Reserve has buoyed emerging market currencies, and the nascent rebound in commodity prices are also lifting prospects for developing countries. Investors are turning back to emerging markets after fleeing in the third quarter of 2018. “The U.S. dollar has now peaked, Fed policy has turned and China is responding to slower growth momentum with monetary and fiscal stimulus,” Paul Greer, a London-based money manager at Fidelity International, told Bloomberg. “All of these factors, coupled with cheap valuations and a recovering oil price, should be supportive for EM risk-asset performance.”

Automakers hit with perfect storm. Stagnating sales in China have hit global automakers hard. But a raft of other trends are also acting as headwinds, including tighter emissions requirements, the trade war, Brexit, and plateauing sales in the U.S. and Europe. The job cuts by Jaguar, Ford (NYSE: F) and GM (NYSE: GM) are an indication of an industry facing restructuring and a degree of upheaval, the FT writes. Related: If It’s Digital, It’s Vulnerable

Financial markets signaling recession. The widely-anticipated “yield inversion,” in which near-term interest rates on U.S. Treasuries exceed those dated several years out, is edging closer to reality. The yield curve inversion has reliably predicted oncoming economic recessions for decades. There are a long list of other indicators that offer a pessimistic outlook, according to Bloomberg. Goldman Sachs’ recession indicator puts the odds of a downturn at 50 percent.

Commodities

Newmont Mining to buy Goldcorp for $10 billion. Newmont Mining Corp. (NYSE: NEM) announced plans to take over rival Goldcorp (NYSE: GG) for $10 billion. The acquisition will create the world’s largest gold mining company. The purchase also comes only three months after Barrick Gold (NYSE: GOLD) paid $5.4 billion for Randgold Resources. Newmont was “clearly not willing to sit back and let Barrick take the limelight,” Kieron Hodgson, a natural resources analyst at Panmure Gordon in London, told Bloomberg. Taken together, the gold industry has undergone significant consolidation.

Uncertainty benefits gold. Gold prices edged up at the start of the week after a raft of worrying news. Data from China added more evidence to a slowdown. The UK is set to vote on Prime Minister Theresa May’s Brexit package on Tuesday, a vote that is expected to face defeat. Greece also faces political upheaval and new elections, potentially as soon as this week. The government shutdown in the U.S. has also rattled markets. “If as some people expect it actually continues into February, there is a risk of a negative impact on the US economy. This should also keep gold demand at a high level,” Commerzbank wrote in a note.

China’s imports and exports declined. In a sign that the Chinese economy is slowing down, both imports and exports fell in December. Exports fell 4.4 percent from a year earlier, while imports plunged 7.6 percent. The data was echoed by the recent wave of bad news from Apple (NASDAQ: AAPL) and Jaguar Land Rover, both of which recently reported disappointing figures in China. Meanwhile, China’s trade surplus with the U.S. in 2018 was the largest ever, which could provoke the Trump administration into taking a harder line on the trade war.                  

Energy

Permian discounts narrow for fourth quarter. The discounts for oil based in Midland for later this year have already narrowed. Anticipating the startup of several crucial pipelines, contracts for Midland crude for the fourth quarter have converged towards WTI based in Houston. The discount has narrowed to just $0.75 per barrel relative to WTI, which is about $5 per barrel higher than current spot prices. An estimates 2 million barrels per day of pipeline capacity is slated to come online in the Permian by the end of the year.

Chevron and Occidental invest in carbon capture. Chevron (NYSE: CVX) and Occidental Petroleum (NYSE: OXY) are investing in a Canadian carbon capture company called Carbon Engineering. The size of the investments have not been disclosed and are likely small, but the moves are notable because they suggest large oil companies are planning for a carbon-constrained future.

Related: Investors Turn Bullish On Gold ETFs

BP uses tech to find 1 billion barrels of additional oil. BP (NYSE: BP) said that it has discovered two new oil fields in the Gulf of Mexico and added 1 billion barrels of additional oil to an existing field because of new advancements in seismic technology. BP said it would spend $1.3 billion to expand its Atlantis project – Phase 3 will add 38,000 bpd by 2020.

Cryptocurrencies

How to turn Bitcoin into usable currency. Bitcoin has still not become a widely usable currency, even when it saw prices spike in 2017. In everyday commerce, cryptocurrencies are hardly used. On Bloomberg’s Odd Lots podcast, Pierre Rochard of Bitcoin Advisory discusses what is still needed to transform Bitcoin from a speculative bet into a real usable currency.

Bitcoin prices fall back again. After rebounding above $4,000 in late December, Bitcoin is trending down once again. Prices have fallen close to $3,500, dashing hopes of investors betting on a rebound. Earlier this month, Forbes reported that a “whale,” or major investor, made a one-time splash in Bitcoin that helped drive prices up. Experts are at odds over how to explain the latest slide in prices.

Bitcoin adoption remains “trivial.” A survey from the Bank of International Settlements (BIS) says that the take-up of cryptocurrencies remains “trivial.” BIS also warned investors that they were at risk of losing money if they invested in Bitcoin and other cryptocurrencies. “No central banks reported any significant or wider public use of cryptocurrencies for either domestic or cross-border payments in their jurisdictions,” the BIS report concluded. “Usage of cryptocurrencies is assessed to be either minimal (‘trivial/no use’) or concentrated in niche groups.”

By Josh Owens for Safehaven.com 

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