Market update: Relief rally after the ‘love me tender’ Yuan fixings, oil traders ignore OPEC, Boris urges the EU to reconsider

9 Aug

by Mihály Tatár

 

Good Morning!

 

  • With the speculation that a Fed and ECB rate cut in September is now more than certain, and Beijing’s ’love me tender’ Yuan fixings – just above the psychological 7.00 level against the Dollar, coupled with the well-timed leak that it is planning the liberalization of its futures markets – ensured a nice relief rally on Thursday (SPX +1.88%, Nasdaq +2.24%, DAX +1.68%, Copper +1.4%). Typically, however, the optimism fizzled out when Washington was said to delay licenses allowing companies to work with Huawei (Shanghai -0.65%, SPX futures -0.50%), and no excitement could be seen in FX and oil prices either (EURUSD 1.12, WTI 52.50, Brent 57.30 – as many noted, the effectivness of the Saudi verbal intervention was shockingly low – this is not a surprise, in my opinion, since OPEC has little control over Chinese demand. This is not the same magnitude of a problem as managing supplies after sanctions against Iran.) Prime Minister Boris Johnson urged the EU to show ’common sense’ and rewrite the Brexit deal – one doesn’t need to be a medium to hear the four-letter words flying around in the meeting rooms of Brussels -, but, as Telegraph’s Evans-Pritchard argues, the economic stakes are rising fast for the EU: This week’s escalation of the US-China trade war threatens to engulf the already struggling eurozone through multiple channels of contagion (if China can’t export to the US, its shipments are displaced into Europe, if it devalues the Yuan, it devalues it against everybody including the Euro, hitting exports further. (And remember, in today’s business model, the Eurozone is one integrated giant export machine led by Germany – as someone cynically described, ’surrounded by sugar plantations to keep the euro weak’, with its leadership having done everything to keep internal consumption and fiscal spending low.) The GBPUSD itself has been trading sideways at 1.2150, with more and more commentators forecasting parity or near-parity in the case of hard Brexit (I guess finally they have taken positions after missing the 8% depreciation since May).

 

  • Veteran strategist David Goldman argues that the focus on the Yuan exchange rate (as a reason for the de-industrialisation of the US) by both Democrats and Republicans is wrong: The problem lies elsewhere, in the symbiosis of the large American technology companies and Asian (not only Chinese) many-times-over-subsidized-by-the-state hardware manufacturers. (A striking example: The US invented the computer chip, but by 2018, it only produced 10% of the world’s semiconductors. This is not only a disaster for workers (see the development of real wages) but also a disaster for national security, as they are what steel was to conventional war a century ago). A Dollar depreciation would hurt Asian exporters but wouldn’t change this dynamic – America would need a Sputnik moment (when the entire US elite was shocked to see the Soviet progress in space technology) as only a government-supported high-tech race could help at this point, he concludes.

 

 

Have a nice day,

Mihály

 

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