My opinions on the trade war still remain the same. The market wants to see pen to paper/hands shaking trade deal resolution. I still believe China can remain patient and can wait for a weaker US President. They know President Trump needs a strong economy and more importantly, a rising stock market to win re-election. If markets fall, it will be President Trump who will be forced to the trade table for a China dictated trade deal.
However, as discussed awhile back, there are two wildcards. One is China’s credit problem. We have seen three Chinese banks receiving bail outs in the past few months. China went from 0 to 40 Trillion in debt in a decade, the largest debt bubble/expansion in human history. They are bound to have their debt issue similar to the US in 2008 during the great financial crisis. Is this coming soon? What keeps the Chinese Communist Party up at night is the threat of the Chinese people rising up and overthrowing them. Revolt and revolution is the CCP’s number 1 fear. Obviously, economic problems and bank crisis’ would definitely provide a spark.
Many also say that China reserves of about 3 trillion dollars is already being used. Some of it is tied up as collateral with the belt and road initiative, and the Chinese may indeed have already used reserves in the past for their currency and now bailing out banks. There are some who even believe that China cannot control their Yuan anymore because they do not have the dollars.
On twitter there was a rumour that even was backed up by Kyle Bass regarding the People’s Bank of China needing loans to help keep the Yuan where it is. HSBC and other banks are supposedly behind this.
Speaking about Kyle Bass, I really recommend you listen to two Real Vision youtube videos. One is Kyle Bass interviewing Steve Bannon on the US-China Thucydides trap. The second is with Chinese Billionaire Miles Kwok who lost favour with the CCP and is now an enemy of the state. Some statements about China that will surprise you…including his prediction of what will happen to Jack Ma. He also explains the CCP’s grand strategy and it is similar to what I have spoken about. They are attacking US Dollar demand for hegemonic reasons.
The second wild card, which also ties in with the people revolting, is food. China’s pig population has been decimated with swine flu and the army virus. Food prices have gone up in China and the government is now subsidizing food, especially pork.
I spoke about this before. The Americans knew this and relaxed tariffs so China could get some foodstuffs. Some say this was a mistake. However, this was intended to be a goodwill gesture that the CCP would not forget and make negotiations more relaxed. Unfortunately, the Chinese are likely to see this as some sort of weakness.
China needs food. Countries like Russia and Brazil may be the real winners as China looks to them for foodstuffs. Even though the market may be looking to sell agricultural futures due to tariffs and trade war headlines, there is a big fundamental reason to be bullish on them.
Interestingly enough, the charts show some good confluences such as exhaustion of the downtrend and consolidating at a support/flip zone.
I personally like the Soybeans chart as it shows a double bottom and two fake out patterns/candles.
The markets are showing some signs of shaking off this trade war rhetoric…but of course the market could just be realizing that this trade war may have a long way until resolution. Hence why the markets want cheap money (cutting interest rates) and maybe even eventually some sort of stimulus (will not be called QE).
I have outlined why these two things WILL be happening. So perhaps the markets now know that the party is not over and central banks will keep stocks propped.
Again barring some geopolitical event, markets will remain propped due to those two reasons and quite frankly, because there will be nowhere to go for yield.
China is still the big one to watch. If the CCP wants to maintain their power and fear the people revolting, they can do something to distract the people and blame outsiders. Sending the army into Hong Kong is a possibility but maybe even saber rattling with Taiwan. You need to remember, when government/politicians are desperate to hold power because they cannot step down due to the threat of being arrested, they will do anything to protect themselves including war and conflict. Erdogan in Turkey is also one to watch.
Some interesting equity charts as well: