Economic and financial woes of the world’s advanced and emerging economies are building

Annual meetings of the International Monetary Fund (IMF) and the World Bank seem to coincide with the onset of financial crises, as with the Hong Kong meeting in 1997 (Asian Financial crisis) and the Bali meeting last week (threatened crisis).

Do these gatherings trigger crises by exposing financial vulnerabilities, or exacerbate them (as with the 2008 meeting soon after the Lehman collapse)?

We could call this a “critical mass” theory. The annual gatherings of the so-called “Bretton Woods twins” bring together in one city (or beach resort, as was the case in Bali) not only finance ministers and central bank governors from some 180 countries, but also thousands of bankers and securities company heads (not to mention a few more thousand news-hungry journalists).

For those given to concocting (not too off-the-wall) conspiracy theories, the present storm in equity and bond markets might be seen as a case of “the empire strikes back.” The empire here is China which, with a few well timed disposals (or rumours) of parts of its US Treasuries war chest, is able to send bond yields spiking and equities crashing.

Why do that when China would be among those to suffer? Because a tumbling Wall Street could quickly take the wind out of the sails of the US economy and those of President Donald Trump, who has bragged repeatedly that the US is better able to withstand a trade war than is China. There is still time for him to back track if a Wall Street collapse is threatened. Signal sent!

The Trump trade wars have already turned into currency wars (as predicted in this column). By allowing the renminbi to depreciate, Beijing has signalled that it has other ways of fighting back than just imposing counter tariffs on the US. A falling renminbi takes some of the sting out of Trump’s tariffs by raising the local currency value of China’s exports.

Volatile capital flows, foreign exchange pressures and higher borrowing costs have buffeted emerging markets as major economies have begun rolling back the very low interest rates that have prevailed since the 2008 Global Financial Crisis, said the Peruvian central bank governor Julio Velarde Flores, who’s also First Vice-Chair of the G-24.

Whatever the reason for what might come to be called the Bali Meeting Crash (like the Hong Kong crash in 1997 and the Lehman crash in 2008), a comment this week by Stephen Innes of currency trader Oanda seemed to sum up the situation.

“All bets are off,” Innes said. “The US equity bloodbath is taking no prisoner as a sea of red greets investors and equity deleveraging and liquidation intensify.”

If this “bloodbath” stops short at a salutary correction (knocking maybe 10 to 20 per cent off equity valuations, as some optimists suggest), it would be a mercy and a wonder.

The legacy of 10 years of furious debt build-up at the corporate, household and government levels plus irrational exuberance in stock markets will most likely be more than a mere technical correction.

Yet, if Trump calls off his trade troops and China buys back some US bonds, the “music” could continue for a while longer.

Oil update : Batten down the hatches

Oil traded above $74 a barrel on concerns Hurricane Michael in the U.S. may exacerbate a supply crunch, while the International Energy Agency warned higher prices may put the world economy at risk.

Futures were little changed in New York after gaining 0.9 percent on Tuesday. OPEC and other key producers need to boost output as the oil market is entering a “red zone,” and high prices are inflicting damage on the global economy, IEA Executive Director Fatih Birol said in an interview. Adding to supply risks is Hurricane Michael, which curtailed oil production in the Gulf of Mexico by 40 percent as it heads to Florida.

“The oil market remains overly bullish on the dwindling spare capacity argument,” said Stephen Innes, Singapore-based head of Asia Pacific trading at Oanda Corp. Still, the IEA’s comment suggests “prices are peaking at the most opportunistic time given the waning global growth narrative.”

Crude has climbed more than 15 percent since mid-August as uncertainties remain on whether the Organization of Petroleum Exporting Countries can replace shrinking supplies from Venezuela to Iran. The rally has prompted President Donald Trump to continue his attack against the group for letting prices surge, while Russia says the U.S. sanctions on the Persian Gulf state is to blame for the gains.

West Texas Intermediate for November delivery was at $74.77 a barrel on the New York Mercantile Exchange at 9:37 a.m. in Seoul, down 19 cents. The contract rose 67 cents to $74.96 a barrel on Tuesday. Total volume traded was about 48 percent below the 100-day average.

Brent for December settlement was 5 cents lower at $84.95 on the London-based ICE Futures Europe exchange. The contract climbed 1.3 percent to $85 on Tuesday. The global benchmark crude traded at a $10.30 premium to WTI for the same month.

Mixed signals for oil in early Asia trade

TOKYO, Oct 10 (Reuters) – Oil prices edged lower on Wednesday after the IMF lowered its global growth forecasts but prices were supported as Hurricane Michael churned towards Florida, causing the shutdown of nearly 40 percent of U.S. Gulf of Mexico crude output.

Brent crude futures were down 2 cents at $84.98 a barrel by 0049 GMT, after a 1.3 percent gain on Tuesday.

US. West Texas Intermediate (WTI) crude was down by 16 cents, or 0.2 percent, at $74.8 a barrel, after rising nearly 1 percent in the previous session.

The International Monetary Fund downgraded its global economic growth forecasts for 2018 and 2019 on Tuesday, potentially tempering demand for oil and its products.

Trade tensions and rising import tariffs were taking a toll on commerce while emerging markets struggle with tighter financial conditions and capital outflows, the IMF said. “Prices are peaking at the most opportunistic time given waning global growth narrative,” said Stephen Innes, head of trading APAC at OANDA in Singapore.

In the United States, nearly 40 percent of daily crude oil production was lost from offshore U.S. Gulf of Mexico wells on Tuesday because of platform evacuations and shut-ins ahead of Hurricane Michael.

Oil producers evacuated personnel from 75 platforms as the storm made its way through the central Gulf on the way to landfall on Wednesday on the Florida Panhandle.

Reuters

 

Yuan has the doomy 7 in sights

(Bloomberg) — Bets are mounting that China’s currency will slide to a level not seen since the global financial crisis, as the government tries to shield the economy from a trade war.

The notional value of new options betting the yuan will weaken past the psychological milestone of 7 per dollar is at the highest since depreciation pressure really began to pick up in June. Last week saw more wagers added than in mid-August when the currency hit a 19-month low and authorities used verbal warnings and stronger fixings to deter speculators. Bears are also acting in the forwards market, where the offshore yuan’s 12-month outright contracts slid past 7 for the first time in over a year.

Bank of America Merrill Lynch and JPMorgan Chase & Co. are among the global banks to have lowered their yuan forecasts, predicting it will hit 7 versus the greenback within six months. That’s a level it hasn’t reached in more than a decade because the government — wary of capital outflows — hasn’t allowed it to.

“China may find yuan hitting 7 more acceptable now because it’s prioritizing looser liquidity over a strong exchange rate and it’s less concerned with fund outflows thanks to capital controls,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp Ltd. in Singapore. “However, a break of the level will likely trigger faster drops in the yuan and hurt stocks, so we could see more intense official management at that point.”

The PBOC still has tools to arrest the yuan’s slide, from outright dollar sales to squeezing offshore liquidity. Indeed, there are already signs of tightening: one-month interbank borrowing costs in Hong Kong spiked on Tuesday to the highest since June 2017.

“I remain cautiously bearish on the yuan, but I think the path to 7 will be a bumpy one,” said Stephen Innes, Singapore-based head of Asia Pacific trading at Oanda Corp. The PBOC has “a massive war chest to right the ship.”

Bloomberg

Oil drops 1 pct on US Iran waiver talk

Brent crude oil prices fell by more than 1 percent on Monday after Washington said it may grant waivers to sanctions against Iran’s oil exports next month, and as Saudi Arabia was said to be replacing any potential shortfall from Iran.

Hedge funds cut their bullish wagers on U.S. crude in the latest week to the lowest level in nearly a year, data showed on Friday.

Further weighing on prices, Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore, said there was also “chatter that Saudi Arabia has replaced all of Iran’s lost oil”.

But Innes warned that limited spare production to deal with further supply disruptions meant “the capacity is quickly declining due to Asia’s insatiable demand”.

Reuters

OIL dips below Brent 84.00 on Saudi supply talk

Oil in London extended losses below $84 a barrel after Saudi Arabia said it can tap its spare production capacity immediately to offset any declines in Iranian crude exports due to American sanctions

Brent fell as much as 1.1 percent, after retreating 2.5 percent in the past two sessions. Saudi Arabia is pumping about 10.7 million barrels a day and can add another 1.3 million, the kingdom’s crown prince said in an interview. Meanwhile, the Trump administration was said to be in talks with countries that want to continue buying Iranian crude after sanctions resume Nov. 4.

Oil has eased after rallying to a four-year high above $86 a barrel in London last week. Still, traders remain concerned the Organization of Petroleum Exporting Countries and its allied producers aren’t raising output quickly enough and that they may not have the capacity to fully cover a decline in exports from the Persian Gulf state.

“OPEC’s spare capacity issue has been the oil markets biggest mystery for some time with most of that debate falling around mega-producer Saudi Arabia,” Stephen Innes, head of Asia Pacific trading at Oanda Corp. said in an emailed note. “The problem is that the capacity is quickly declining due it Asia’s insatiable demand.”

Bloomberg

Saudi -Russia supply , and a huge US inventory build tempers Oil bulls

U.S. West Texas Intermediate (WTI) crude futures CLc1 were down 30 cents, or 0.4 percent, at $76.11 a barrel.

“Data for last week showed a much more significant than expected … build in U.S. commercial crude (inventories), which generally suggests that oil prices should tumble,” said Stephen Innes, head of trading for Asia-Pacific at futures brokerage Oanda in Singapore.

U.S. crude oil stocks C-STK-T-EIA rose by nearly 8 million barrels last week to about 404 million barrels, the biggest increase since March 2017, Energy Information Administration data showed on Wednesday.

U.S. weekly Midwest refinery utilization rates dropped to 78.9 percent, their lowest since October 2015, according to the data.

Meanwhile, U.S. crude oil production C-OUT-T-EIA remained at a record-high of 11.1 million barrels per day (bpd).

“This on top of the other big news of the day from Riyadh that … Saudi Arabia and Russia will boost output,” Innes said.

Reuters

Risk remains unsettled as global shares trade mixed

KEEPING SCORE: The CAC 40 in France edged 0.1 percent higher to 5,472.12 and Britain’s FTSE 100 added 0.1 percent to 7,482.23. Italy’s FTSE MIB gained 0.3 percent to 20,623.32, after a string of losses. German markets were closed for a national holiday. U.S. indexes were poised to open higher. Dow futures gained 0.2 percent to 26,865.00. The broader S&P; 500 futures rose 0.2 percent to 2,935.50.

ITALY’S SPENDING: The Italian newspaper Corriere della Sera reported the government will reduce its budget deficit targets after 2019. It said the deficit will be set at up to 2.4 percent of gross domestic product next year as announced. But it will likely be cut to 2.2 percent in 2020 and 2 percent in 2021. Markets reacted with relief: Italy has the second highest level of debt in the eurozone after Greece. On Tuesday, Deputy Prime Minister Luigi Di Maio insisted the government “will not back up one millimetre” from its new spending plans, despite criticism from other members in the 19-country bloc.

ANALYST’S TAKE: “Given the emotional nature of Italian politics, there will be lots of political manoeuvring ahead of the final decision, so the market will probably be less keen to extrapolate too much out of today’s headline,” Stephen Innes Head of Trading Asia at OANDA said in a commentary.

Washington Times

Oil has sprung another gusher

Rising oil prices aren’t great news for the car industry. If petrol becomes pricier, it may deter some consumers from buying a new motor.

But another issue is casting a shadow over the Paris Motor Show today – Brexit.

Dieter Zetsche, the CEO of Daimler, has warned that the risk Britain leaves the EU without a deal is a serious worry.

Zetsche told the Motor Show that:

“Possible scenarios are highly worrying. We have analysed possible scenarios since the (2016 Brexit) referendum to prepare ourselves.

In sum, it is an extraordinarily sad development.”

Peugeot is also concerned. Its European boss, Maxime Picat, told Reuters that its UK manufacturing could suffer if new trade barriers are set up after Brexit.

Picat warned:

“We’ve been doing all we can to develop our UK business, restore Vauxhall and Opel profitability, reinvesting in Luton and improving our sites’ competitiveness in order to help them face up to an uncertain future.

But there are limits. Those limits are customs barriers, and the loss of freedom of movement, for people and goods. If we get to that point, we will be obliged to take measures.

If we suddenly have to start manufacturing for the UK in the UK, and for Europe in Europe, there will necessarily be an impact on UK production.

OIl has “sprung another gusher overnight”, says Stephen Innes of trading firm OANDA, as he watches the US crude price hit a fresh four year high.

He believes the new USMCA trade deal is also pushing crude prices up:

Ultimately the markets remain singularly focused on the prospect of supply disruptions from Iran which is the primary driver of oil prices.

And of course, the US/Mexico/Canada trade agreement will have a longer-term positive impact on oil prices in a broader macro context.

The Guardian

 

Risk off tone helping gold prices

Asian stocks fell, with MSCI’s broadest index of Asia-Pacific shares outside Japan declining more than 1.5 percent after a steady start, as cautious views on the global economy curbed risk sentiment.

Spot gold was up 0.5 percent at $1,193.80 as of 0748 GMT, after declining about 0.3 percent in the previous session. U.S. gold futures were 0.5 percent higher at $1,197.60 an ounce.

“Gold has been nudging higher as risk has been trading a bit unsettled in Asia,” said Stephen Innes, APAC trading head at OANDA in Singapore.

Optimism surrounding a last-minute deal between the United States and Canada on Sunday to salvage NAFTA as a trilateral pact with Mexico, had increased the appetite for riskier assets on Monday.

Reuters