Market update: Investors prepare for the G20, Chinese manufacturing drops, Hillary Clinton U-turns

by Mihály Tatár

Good Morning!

• Investors turned more cautious before the G-20 meeting in Buenos Aires (SPX -0.22%, Nasdaq -0.25%, DAX -0.01%, MIB +0.23%, Nikkei +0.39%, Shanghai +0.46%), with all eyes, of course, on the Trump – Xi meeting. (The event is dubbed ’Godzilla versus Robogodzilla’ by traders. After the leaks, the expectations are high that at least an understanding can be reached – for example China could pledge to reduce support for its state owned companies and give US companies better market access, in return for the US calling back some tariffs. A cease fire is also helped by the rapidly deteoriating Chinese data – surprise, surprise, the Chinese Manufacturing PMI just dropped to 50.0, the lowest since mid-2016 – and by the growing Asian resentment towards Beijing – Japan, for example, announced it will rebuild its helicopter carrier ships into aircraft carriers and buy 100 (!) F-35 stealth jets. That said, and market relief rallies aside, a real and lasting trade will be very hard to reach given the fully opposing long-term interests and given that an entire generation of Chinese leaders grew up by successfully disregarding contractual promises – WTO membership obligations, respect of technology ownership, opening up the financial sector, to name a few examples -, making the Trump negotation team distrustful and hostile of any further promises. In a symbolic development, by the way, Angela Merkel’s plane suffered a malfunction en route to Buenos Aires and had to emergency land in Cologne. No comment.)

• Veteran oil analyst John Kemp notes that Saudi Arabia is now in an incredibly uncomfortable situation: The market looks strikingly similar to 2014, when the production from US shale was surging while the global economy slowed down at the same time. Even worse, Saudi Arabia’s official reserves are down to just over 500 billion USD, from almost 750 billion USD in 2014 – it needs several hundred billion just to maintain confidence in the Dollar peg, without even spending on its wars in the Middle East -, so it can not afford another slump in oil revenue, nor can it provoke the US. The choice is painful: Cut production to defend prices (the 2016 decision) or allow prices to fall to protect market share (the 2014 decision). Internally, the 2014 decision is characterised as a failure – it halted the US shale but wrecked finances – , while 2016 is viewed as a victory, altough it directly led to today’s situation. (In my personal opinion, it is highly likely, that analysts still vastly underestimate China’s role in shaping the oil price. The only positives that come to my mind are that 1. the global ex-China slowdown is not that dramatic so far as reported, in 2009 we had been quite happy with these figures, and 2. if the Dollar weakens, it will somewhat support energy prices.)

• In a truly bizarre development, Hillary Clinton made a giant U-turn on her views on migration and gave several interviews in which she talked about the dangers of uncontrolled and too generous immigration policy, creating shock and disbelief in the mainstream media. (She even critized Merkel’s 2015 decision! Wow.) Typically, she remembers as if she had always been on this view (Mr.Soros and Google must be happy, given the amounts they have spent on her), but what is more important is that cracks began to show at the US Democrats whether voters’ opinion on immigration should be accommodated or not. (As said here before, the Left has clearly lost the argument on open borders. The key question going forward is whether left-leaning candidates in the US and Europe can credibly promise an anti-migration stance, or their progressive-leaning party members destroy them.)

Have a nice day,

Mihály

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