Month: July 2018

After a relentless tweetstorm this morning which covered far too many things to be able to summarize here, Trump once again lashed out at Harley Davidson for moving part of its non-US focused production abroad, and said that he was working with other motorcyle companies “who want to move into the US”, noting that Harley customers “are not happy with their move” as sales are down 7%, although it was not quite clear how he made the connection between the company’s offshoring decision and declining demand for hogs.

Now that Harley-Davidson is moving part of its operation out of the U.S., my Administration is working with other Motor Cycle companies who want to move into the U.S. Harley customers are not happy with their move – sales are down 7% in 2017. The U.S. is where the Action is!

Now that Harley-Davidson is moving part of its operation out of the U.S., my Administration is working with other Motor Cycle companies who want to move into the U.S. Harley customers are not happy with their move – sales are down 7% in 2017. The U.S. is where the Action is!

— Donald J. Trump (@realDonaldTrump) July 3, 2018

Harley’s stock price remains subdued and was trading near the lowest levels since the start of 2016.

While it is unclear just what Trump’s endgame here is, we would not be surprised if HOG management caves, and announces it is halting its offshoring plans, if only to stop the daily presidential bully pulpit harassment from the president.

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Submitted by Bill Blain of Mint Partners

“Tu el aire que respire yo, y la luz de la luna en el mar. La garganta que ansio,mojar que temo ahogar de amor…”

Am I right to be a tad concerned about Oriental stock markets…? July is a month for lazing, for watching Wimbledon, Pimms over-exuberance and properly long lunches.. Stock market crashes could really ruin the mood. As is traditional, tomorrow I shall be going out for a “proper lunch” to celebrate getting rid of the Americans 242 years ago. However, aside from the Trade Spats, there are other deeper themes bubbling under the surface.

The bear Shanghai market {SHCOMP Index GP } I can kinda get (see below), but I’ve been expecting a more positive play from Tokyo {NKY Index GP }. It shouldn’t be sliding – but it is. My stock chartist Guru, Steve Previs, tells me its’ because the Far East markets are “breaking down under intense pressure”. In contrast “the falling safe catching dip buyers” are still out in force in the US. What happens when the don’t show? Are we set to see the US tumble as well? (Clue: take a look at {SPX Index GIP10 ). Should that wave formation worry us?

What is going on in China? The consensus is that rising corporate defaults are still being cosmetically massaged to look less damaging, while rising rates and the trade war implications are impacting confidence – classic double whammy on confidence.

My chief economist, Martin Malone, gave me a crash course in the underlying drivers. (I’ll be interested what clients think.) He sees the current slide as due to 1) deleveraging domestic credit to manage excesses in the real estate market, and 2) “trade-friction” from the US tariffs that kick in on Friday! He’s looking the PBoC to carefully manage the situation – economic and financial stability is mantra, not just a goal, in China. Will a resolution of the trade spat (as Jaw,Jaw replaces War, War talk) and renewed negotiations flip the market higher? Watch to see when Xi Jinping’s crisis manager Wang Qishan gets on a plane to Washington. 

Another piece of data Martin shared with me y’day were some UN “working age population” (WAP) numbers. By the end of this century Europe’s WAP will have declined by 130mm (about 30%) while Africa will jump from 500mm to close on 2.5 bln. Go figure the policy implications, the challenges and opportunities that creates. It sets your mind on fire. (I’ve attached a snap-shot of the table.)

More immediately, what connects the election of a lefty populist in Mexico, the outlook for Brazilian elections later this year, the migration spat in Germany, rising inequality, and the fact Russia is having probably the most effective World Cup ever (forget their football, (which makes Arsenal look exciting), but focus on the Putin Charm Offensive), collectively tell us? Change is in the air. Next week Trump is Yoorp, but it’s his meeting with Putin that’s getting the focus.

Many of things we took for granted would happen this year look to have become derailed. Our expectations of globally aligned normalisation and economic recovery are fading. Growth hopes have been replaced by headlines about trade wars. 

This morning’s news of a truce in Germany as Merkel compromises with Seehofer over migration controls takes some of the immediate pressure off Europe. Let’s be brutally honest – when Germany sniffles, Europe is straight into the high dependency ward. Everything is set for change next year in terms of European parliamentary elections, new EU officials (Tusk and Junker both go – and if I could remember which of them did what, I’d tell you…). There is much danger in horse-trading that will surround the new ECB head (note how the Portuguese just got a former politician appointed!), and it could lead to something very sub-optimal..

And just around the corner is Brexit… (yes, it affects Europe as much as the UK).

Many of the hopes we had for Europe – a new Franco/German drive on Banking Union, common financial, digital, energy, defence and fiscal policies – now look unachievable. Germany ain’t focused externally. The migration deal hammered out last week looks just like what was deemed unacceptably Hungarian just 4 years ago. The Macron dream of closer federation are now mired in internalised factionalism in Germany as Merkel clings to her wobbling throne as German politics drift rightwards into the arms of the AfD. Italy is heading for confrontation with Europe over finance and fiscal spending.

In short – there is a European crisis brewing. But… there is always a European crisis… its just the way of things….

How to play it? If you buy the scenario Europe is unlikely to be fixed any time soon – that means there remains value in European bond markets: what alternative will a more politically orientated ECB have expect QE forever? Or is the state of Europe just something that is, get over, and look for bargains – there are some very enticingly cheap looking stocks out there.

In terms of the US, it’s a very different tale. I’ve been talking with my bond structuring team in Paris (part of our sister firm Aurel) who’ve been active in Constant Maturity Swap (CMS) deals – a levered play on yield curve steepening. You can still read acres of copy about how the flattish US curve means a looming recession – or is it simply the effect of the US economy being on track to normalise quickly – in which case curve-steepening plays make screaming good sense. If anyone wants updated pricing on US$ and Euro curve plays – let me know!

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For the first time since Nov 2014, WTI Crude futures front-month contract has topped $75.

All of which means Trump better get back on the phone and ask for 3mm b/d from the Saudis as Americans are about to face a huge tax rise as gas prices at the pump are high and about to get higher…

As RBC analyst Michael Tran writes in a report today, “retail gasoline is pricing the highest in years, but demand remains relatively firm, ” because consumers are “held captive to the type of vehicle owned.”

This ensures that gasoline demand is less “price-elastic” than in previous comparable periods, but leaves the disposable income taking a bigger hit.

And as OilPrice.com’s Robert Rapier notes, the irony of this huge rally is that it was sparked by the announcement by OPEC that it would increase production.

Oil prices had weakened over the past month following a call from President Trump for OPEC to increase production in response to rising oil prices. After rising above $70 per barrel in May, the price of West Texas Intermediate (WTI) had dropped back to $65/barrel leading up to OPEC’s June 22nd meeting.

It was widely anticipated that the group would decide to bump output at the meeting. At the meeting’s conclusion, OPEC, in agreement with Russia, announced that it would increase production for the first time since implementing production cuts in November 2016.

But WTI rallied by more than 4% following the announcement. Why? Because the market was underwhelmed by OPEC’s decision.

OPEC announced that it would restore about one million barrels per day to the market, beginning this month. Iran had opposed the move, partially in protest of sanctions from the Trump Administration. In reality, the output increase isn’t expected to exceed 700,000 barrels per day because some members are already pumping at maximum capacity.

Further, this output increase won’t be enough to balance the oil market. The most recent Oil Market Report (OMR) from the International Energy Agency (IEA) projected the amount of oil that would be needed by OPEC through 2019 in order to balance the markets:

(Click to enlarge)

By the end of this year, the call on OPEC is expected to be nearly 1.5 million BPD more than they were forecast to produce. Thus, even if OPEC managed to follow through on the full output increase, it would be insufficient to prevent further declines in global crude oil inventories. Expectations that this production increase won’t be enough to stabilize these inventory levels are the primary driver behind last week’s oil price surge.

Also bear in mind that Saudi Aramco is still planning its IPO. Saudi Arabia would like oil prices to remain elevated, while appeasing President Trump. OPEC’s action potentially satisfies President Trump’s request while ensuring that oil prices remain strong.

Oil prices surged again on news that the U.S. was pressuring its allies not to import oil from Iran, lest they risk sanctions. Iran currently exports 2.9 million barrels per day of crude oil and condensate to Asian and European markets. Even if there is modest compliance with this Trump Administration request, it could accelerate the depletion of global crude oil inventories. That would likely drive oil prices even higher.

That would also make U.S. oil producers happy. Refiners, on the other hand, would likely suffer. Higher oil prices erode the margins of refiners, resulting in lower profits. So even though refiners welcomed the news on biofuel mandates, the spike in oil prices will probably have a bigger negative impact on earnings in the short term.

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The Chinese Embassy in Washington issued a security advisory last week, warning Chinese citizens traveling to the US that “shooting, robbery, and theft are frequent.” Tourists were also warned to “be alert to suspicious people around you, avoid going out alone at night.”

In addition to getting killed and mugged, the embassy warned Chinese tourists to be aware of issues including expensive medical bills, searches and seizures by customs agents, telecommunications fraud and natural disasters.

Further trolling the US, the alert published on the embassy’s website last Thursday said that “public security in the United States is not sufficient. Cases of shootings, robberies, and theft are frequent.”

Commenting on the notice, China’s Foreign Ministry said summer is usually the peak season for Chinese citizens to visit the US and that it was the Chinese Embassy’s duty to warn tourists about potential risks in the country, in response to questions over if the warning is related to the tensions between China and the US.

“This kind of reminder from the Chinese embassy in the relevant country, I think this is absolutely a matter that is in the scope of our duty,” ministry spokesman Lu Kang told a regular news briefing quoted by Reuters.  There was little mention of the latest embassy alert on Chinese social media.

While China frequently issues travel warnings for Chinese abroad – generally in war-afflicted regions – some foreign governments have argued that Beijing uses other means, such as curtailing outbound tourism, to settle political or trade scores, though the Chinese government typically denies such issues are linked. Still, for much of 2017, China banned all group tours to South Korea in the wake of Seoul’s decision to install the U.S. Terminal High Altitude Area Defense system (THAAD), which has a powerful radar Beijing worries can penetrate Chinese territory.

To be sure, China has been warning its citizens about gun violence in the U.S. for years. In 2016, after a Chinese student was shot and killed in Arizona, the embassy told travelers to avoid “crime scenes and tough neighborhoods.” Just a few months ago, the Chinese Foreign Ministry sent a notice via WeChat: “Be careful and prepare for the possibility that gun crimes may occur at workplaces, schools, at home and at tourist sites.”

China may be right: according to a 2015 University of Alabama study, Yemen is the only other country in the world with a higher rate of mass shootings, adjusted for population.

More ominous, however, is that tourists seem to believe the heightened risks, and are putting their US trips on hold: the U.S. has experienced a drop in foreign tourist arrivals, which some have dubbed the “Trump Slump.” Critics are attributing the decline to current political rhetoric and the travel ban, which was upheld by the Supreme Court last week. Travelers from seven predominantly Muslim countries — including Iran, Libya, Somalia, Syria and Yemen — are currently barred from entering the U.S.

In 2016, nearly 3 million Chinese tourists visited the U.S. According to Travel and Leisure, not only are there more Chinese tourists around the world than any other nationality, they’re the most likely to spend money while traveling. In one year, Chinese travelers are estimated to have spent $261 billion abroad.

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Just before the US equity market opens for official business, we thought this little annotated chart of the last 48 hours might help some get a grip on reality…

US stocks love trade wars

Remember – the only thing that will stop Trump’s rising Trade War rhetoric is a stock market crash… so what do you think will happen next as Nasdaq soars?

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President Trump’s scandal-ridden EPA Administrator Scott Pruitt became the latest Trump administration official to be accosted by a random stranger while eating out in Washington, DC on Tuesday evening, when a woman, her young son in hand, approached his table and urged him to resign.

Kristin Mink, a 33-year-old mom from Silver Springs, Maryland, was eating lunch at area restaurant Teaism when she spotted Pruitt sitting three tables over. When her husband pointed Pruitt out to her, she told the New York Post that her initial reaction was “he’s the worst.” She then decided to confront him.

After sputtering out an introduction, the heavily tattooed Mink introduced Pruitt to her young son.

“Hi, uhm, I just wanted to urge you to resign because of what you’re doing to the environment…” she began, reading from her prepared remarks.

“This is my son, he loves animals, he loves clean air, he loves clean water,” she said to Pruitt.

“So I would urge you to resign before your scandals push you out,” she concluded.

Mink’s husband recorded the video, which was later posted to Facebook.

Pruitt and his lunch guest reportedly left after the confrontation – though Pruitt’s spokesman told the Post that his departure had nothing to do with Mink’s confrontation.

“His leaving had nothing to do with the confrontation, he had simply finished his meal and needed to get back to the EPA for a briefing.”

Mink explained that she has been protesting the Trump administration, and was arrested at the Hart Senate Office Building last week over Trump’s “zero tolerance” immigration policy (that happened a week after Trump signed an executive order to cancel the policy).

Pruitt has joined a growing list of Trump administration officials who have either been openly heckled, or asked to leave restaurants in the Washington DC area. Sarah Huckabee Sanders was famously turned away from the Red Hen restaurant in Lexington, Virginia by its owner last month, and Homeland Security Secretary Kirstjen Nielson was infamously heckled by a group of protesters who loudly interrupted her dinner. Trump aide Stephen Miller was also accused of being a “fascist” at a Mexican restaurant in the DC area. In response, Sanders has reportedly received Secret Service protection, the first press secretary ever to do so.

And now that these confrontations have become a trend, largely at the urging of such politicians as Maxine Waters, we wonder how long before they cross the line into outright assault?

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As China’s offshore Yuan collapsed back above the 6.70/USD – after the biggest 14-day rout of the currency in history – PBOC Governor Yi stepped in with comments (and we suspect actions) that lifted the formerly bid-less currency 8 handles for its biggest gain since March.

People’s Bank of China Governor Yi Gang said China will “keep the yuan exchange rate basically stable at reasonable and balanced level,” a repetition of standard language that helped stoke speculation that policy makers are prepared to take tougher actions to arrest the plunge in the currency.

And later – as the effect of Yi’s manipulation was wearing off – a second Chinese official stepped up to the jawboning plate, seemingly saying the opposite of the PBOC governor.

Sun Guofeng, head of the central bank’s financial research institute, said that the currency’s decline isn’t the result of China deliberately weakening it to gain an advantage over the U.S.

“Recently the yuan’s exchange rate has shown some weakness. This is entirely due to changes in market expectations as external uncertainties rise rather than intended guidance of the central bank, ” Sun said in exclusive comments provided to Bloomberg News.

“China upholds multilateralism, globalization, free trade and rule-based international guidelines, and will not make the yuan’s exchange rate a tool to cope with trade conflicts.”

So Yi says – China will manipulate the currency to maintain a stable, balanced level.

But Sun says – China will not intervene, the recent move is all externalities and not an intentional retaliation to Trump trade wars.

You decide…

One wonders if China is attempting to maintain a flexible peg as once again that 6.70 region becomes hard resistance for now…

So what happens next? Analysts are mixed:

Commerzbank analyst Zhou Hao told Bloomberg that “the PBOC is sending a verbal warning and intervention that the recent slump in the yuan was too quick” adding that:

“in the short term, the yuan could strengthen as traders take profit from the recent slide. But if the market ignores the PBOC and keeps pushing the yuan weaker quickly, the central bank may conduct heavy intervention to send a stronger signal.” 

Not everyone was convinced that the yuan weakness is over:

“while it does seem that PBOC is looking to smooth the move lower in the RMB, it doesn’t look like its ready to call time on the downtrend just yet,” said Stephen Gallo, head of European FX strategy at BMO. “My preference here is to continue looking for opportunities to get long of the 3M USDCNH forward in expectation of a move toward the 6.80 area heading further into the summer”  

Presumably it all depends on Trump’s next action – and given that stocks are soaring on the heels of looming trade tariffs, what is to stop him ramping up the rhetoric once again?

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