Monday, October 15, 2018
Stocks continue to slide. Global equities continued on their downward trajectory at the start of the week, as trade tensions and uncertainty over the Brexit negotiations added more momentum to the selloff. The Stoxx Europe 600 was flat, Japan’s Niekkei was down 1.9 percent and Hong Kong’s Hang Seng fell 1.4 percent. The slide is starting to feed into broader concerns about the health of the global economy. “I’m starting to seriously worry that markets may trigger an economic downturn earlier than widely expected, driving a self-fulfilling market adjustment toward more normal (long-term) valuations,” Erik F. Nielsen, group chief economist at UniCredit Bank, said in a note. “There is little chance global policy makers will come to the rescue in time.”
Chart of the Week
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- The U.S. is set to enter the winter heating season with natural gas inventories at their lowest level since 2005. The EIA forecasts inventories ending October at about 3,263 billion cubic feet (Bcf).
- A cold winter last year drew inventories low. Then, the coldest April in 21 years meant that the U.S. got a late start on injection season.
- Natural gas Nymex prices had been hovering around $3/MMBtu for much of this year, but rose sharply to $3.20-$3.30/MMBtu in the last few weeks on tighter supply conditions.
Small caps post losses. Small-cap stocks in the U.S. are suffering their worst downturn in years, “removing another pillar of support for the nine-year bull market as it faces heightened turmoil,” the Wall Street Journal writes. Rising interest rates and bond yields are putting stocks under pressure, and the small-cap index, the Russell 2000, is in correction territory, down 10 percent from its previous high – the first time that has occurred since 2016.
U.S. economy faces deceleration. The head of the world’s largest hedge fund said that tighter monetary conditions could force a slowdown in the U.S. economy. “A lot of optimism about future earnings growth has been baked into equity valuations. But we are at a potential inflection point where the economy is moving from hot to mediocre,” Bob Prince, co-chief investment officer at Bridgewater, said in an FT interview. Prince cited last week’s market turmoil as a sign that investors are realizing the explosive growth in the U.S. this year was peaking.
U.S. finds China not a currency manipulator. The U.S. Treasury Department’s staff has advised Secretary Steven Mnuchin that China is not manipulating its currency. If Mnuchin and the Trump administration accept that recommendation, it could offer some small degree of de-escalation in tensions between the U.S. and China. “We are concerned about the depreciation” of the yuan, Mnuchin told Bloomberg News, “and want to make sure that it’s not being used as a competitive devaluation.”
China builds major lithium producer. Ganfeng Lithium Co. is set to surpass Chile’s Sociedad Quimica y Minera de Chile to become the world’s second largest producer of lithium and it could eventually challenge the top producer, Albemarle Corp. It’s an impressive rise for the company, expanding from controlling just a small share of the lithium market just a few years ago. “It’s changed the face of the industry -- you had the big three and now you’ve gone to the big five,” Mike Tamlin, chief operating officer of Neometals Ltd., a partner with Ganfeng, told Bloomberg.
Gold prices rise to $1,230. Gold prices rose to a two-and-a-half-month high late last week at $1,230 per ounce. “Presumably the temporary suspension of the Brexit negotiations is also playing its part in this,” Commerzbank said in a note. Commerzbank said short-covering was likely a major reason for the recent run up in prices.
Global macroeconomic clouds loom over markets. President Trump reiterated his threat to hike tariffs on China unless they relent and agree to a “fair” trade deal with the U.S. Also, the head of the IMF Christine Lagarde warned about the damage to the global economy from the trade war. Lagarde said global growth is already uneven, and if trade tensions escalate, “the global economy would take a significant hit.” Any faltering could hit commodity prices. “In our opinion, the recovery enjoyed by metals prices since mid-September is still on a shaky footing,” Commerzbank said.
Saudi Arabia threatens retaliation if U.S. acts. Some top U.S. officials threatened to take action against Saudi Arabia if it can be proven that Riyadh murdered the Saudi journalist Jamal Khashoggi. Saudi Arabia, in turn, threatened to “respond with greater action” if the U.S. made a move, a statement that some are interpreting as a threat to cut production in order to push up oil prices. Goldman Sachs says the tension adds more bullish sentiment to crude. Still, Saudi oil minister Khalid al-Falih reiterated his country’s vow to keep oil markets balanced on Monday.
Global oil production surpasses 100 mb/d. Global oil production passed a historic milestone, rising above 100 million barrels per day in the third quarter. The IEA said soaring demand in much of the developing world also pushed demand over that threshold, and more supplies will be needed to meet demand growth in the future. Global liquids production was up 2.3 mb/d from the same period in 2017.
IEA downgrades demand growth. Although demand surpassed 100 mb/d, the IEA also lowered its forecast for consumption to 1.3 mb/d for this year and next year, down from a previous estimate of 1.4 mb/d. The agency cited dollar strength, emerging market weakness, high oil prices and trade tensions for reasons that demand could grow at a slower pace than previously expected.
Bitcoin spikes, falls back. Bitcoin prices spiked in early trading on Monday to above $6,900, a one-month high, before falling back to around $6,500. Other cryptocurrencies saw similar price movements, netting gains on Monday. The top 10 cryptocurrencies saw gains of between 2 and 8 percent over the last 24 hours. The jump is notable since Bitcoin and others posted losses late last week; Monday’s rally erased those losses.
Key crypto mining hub considers tougher regulations. Plattsburgh, New York, a small city that has emerged as an unlikely hub for cryptocurrency mining, is looking at stricter requirements for crypto miners. One local councilor introduced “zoning regulations” for mining activity, requiring them to keep ambient temperatures in their facilities within 120 degrees Fahrenheit at any time. Noise restrictions are also under consideration. The effort is evidence that crypto miners can face some blowback when operations grow too quickly in relatively small places.
Bitcoin not living up to its “safe haven” status. Bitcoin and other digital tokens are often likened to “safe haven” assets such as gold, places to house investments that can act as a hedge against broader market risk. But one quality that a safe haven asset needs to have is insulation from market volatility – something that Bitcoin and other cryptocurrencies have not demonstrated to date. In fact, Bitcoin has seen a correlation with the S&P this year, which makes Bitcoin more of a risk asset rather than a safe haven.
By Josh Owens for Safehaven.com
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