Why the market rebound looks set to run longer

Wednesday, 13 February 2019
Adelaide, Australia
By Bernd Struben

  • Trade war winding down…
  • ‘Contentious Encryption Bill Could Smash Aussie Tech Industry’

Is that it for the market correction?

Or are buy-the-dip investors being lured back in on false hopes?

Time will tell.

Though the ASX is lagging, US and European markets all surged higher. Even the FTSE 100 managed to eke out a gain despite renewed Brexit quandaries. And at time of writing, Asian markets are following their lead.

Over in the US the Dow Jones, up 1.49%, closed at a 10 week high.

And technical analysts will be pleased to see that the S&P 500, up 1.29%, crossed a key technical indicator. As you can see in the chart below, it crossed over its 200 day moving average, a bullish sign:



chart image

Source: Bloomberg
Click to enlarge

All this comes as China’s debts keep mounting and China’s domestic consumer sales keep shrinking. Not to mention the odds of a US, if not global, recession rearing its ugly head are rising.

Oh, and the US national debt just hit US$22 trillion (AU$31 trillion). That’s up US$2 trillion since Trump took office two years ago.

Sustainable?

Hardly. But why leave when the party is in mid swing?

And this week investors appear happy to shrug off those worries.

So why the boost in investor euphoria?

Donald Trump, of course. Market manipulator extraordinaire.

More, after the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 372.65 points, or 1.49%.

The S&P 500 gained 34.93 points, or 1.29%.

In Europe the Euro Stoxx 50 index finished up 25.14 points, or 0.79%. Meanwhile, the FTSE 100 rose 0.06%, and Germany’s DAX closed up 111.49 points, or 1.01%.

In Asian markets, Japan’s Nikkei 225 is up 331.50 points, or 1.59%. China’s CSI 300 is up 1.03%.

In Australia, the S&P/ASX 200 is down 16.98 points, or 0.28%.

On the commodities markets, West Texas Intermediate crude oil is US$53.44 per barrel. Brent crude is US$62.42 per barrel.

Buoyed by the broader marker rally, both WTI and Brent bounced about US$1.00 per barrel since this time yesterday.

The current price is right in the middle of the range I expect to see crude trading in 2019.

Anywhere below US$50 per barrel for WTI will see many US shale-oil producers struggle to turn a profit. Anywhere above US$60 per barrel should see an even greater surge in US production.

And US oil producers are already on a record tear. From Bloomberg:

Crude supply will average 12.41 million barrels a day this year and 13.2 million in 2020, the U.S. Energy Information Administration said on Tuesday, up more than 300,000 barrels a day from the previous month’s estimates.

If the EIA’s estimates prove correct, the US will set a new production record for the third year in a row. And it should see the US becoming a net exporter of crude next year.

That news is sure to send a fresh shiver down OPEC’s back.

Or I should say OPEC+, to be precise. That’s the expanded cartel, formed two years ago, which now includes 24 nations.

They’d all like to avoid a supply glut. And the block recently agreed to reduce output to boost prices. But with member states’ cash hungry governments eyeing tens of millions of dollars in potential lost revenue, enforcing those agreements tends to prove trickier than putting pen to paper.

That’s especially so when two of your partners are the ever-reliable governments of Russia and Kazakhstan. As Bloomberg reports:

Russia, the biggest non-OPEC producer in the alliance, pushed back the schedule for full implementation of its cutback by a month, without giving any explanation. Full compliance won’t be reached until May, Energy Minister Alexander Novak said on Feb. 4, having previously said this would be achieved within the first quarter.

Kazakhstan, another nation in the coalition, said that it actually increased production in January rather than trying to cut back. The country has shown little regard for its obligations under the pact, having boosted output substantially over the past two years instead of cutting.’

You can imagine how the Russian and Kazakh negotiators were briefed before heading off to the last OPEC+ meeting. It probably went something like this:

‘So we agree to the cuts, the oil price goes higher, and we keep on pumping at full capacity?’

‘Da!’

‘Where do I sign?’

Turning to gold, the yellow metal is trading for US$1,311.33 (AU$1,845.90) per troy ounce. Silver is US$15.72 (AU$22.13) per troy ounce.

One bitcoin is worth US$3,588.34.

The Aussie dollar is worth 71.04 US cents.

Trade war winding down…

Love him or hate him (there’s rarely a middle ground here) Trump certainly keeps things interesting for investors.

His ability and willingness to move global markets is unmatched by any president in history.

Last year he talked down the oil price, convincing the Saudis and Russians to keep pumping even as US crude producers were flooding the market.

Then he managed to cow Fed Chief Jerome Powell into backtracking on any likely additional US interest rate rises this year.

Now he’s got investors on edge over whether he’ll shut down the government again over the unrealised border wall funding. And, far more importantly, whether he’s ready to bury the hatchet with China on trade.

As for another government shutdown, I reckon Trump will sign off on the agreement reached between Democrats and Republicans.

Although he says he’s ‘not happy about it’, he simply took too much blame for the last shutdown. And if he signs the compromise bill, he’ll be able to point the finger at Democrats every time an illegal immigrant commits a crime. Not unlike what Scott Morrison intends to do to Labor whenever the next migrant boat shows up in Australian waters.

On the far more critical trade war front, I’ve been writing for months that we should see a resolution early in 2019. And I still see it that way.

Chinese President Xi Jinping is presiding over an eroding economy. It’s still growing, mind you. But not nearly fast enough to meet the demands of China’s rapidly urbanising populace. And the growth it is seeing is largely thanks to a mountain of debt.

But those debts are catching up to it, with new reports of bond defaults and corporate failures coming out almost daily.

And for a nation shifting towards a consumer driven economy, the latest news on Chinese consumer spending was less than welcome.

Car sales actually fell. That’s the first time this has happened since the 1990s, according to the AFR. But it’s not just the Chinese auto sector taking a hit:

Consumption growth in China is “very likely” to slow further this year as the economy cools, the commerce ministry said on Tuesday…

Chinese authorities have already rolled out a flurry of support measures to temper the effects of the trade dispute on businesses and investment, and are counting on the nation’s vast consumer base to cushion a broader economic slowdown.

Xi might have one of the best poker faces on Earth. But he’s got to be increasingly desperate to get Trump’s foot off his neck.

Strong labour market aside, the US economy is also looking at a major slowdown as the stimulus from Trump’s massive corporate tax cuts begins to peter out.

Nobel winner Robert Shiller — renowned for developing the cyclically adjusted P-E ratio (CAPE) — believes the US could enter a recession this year…or next.

Consensus estimates from economists surveyed by Bloomberg puts the risk of recession in 2019 at 25%.

Whether or not the US is set for contraction doesn’t really matter here. Not today, at least. Or over the next few months even.

What matters is that Trump is aware that this risk is just over the horizon. So, like Xi, Trump has plenty of incentive to put an end to the trade dispute.

Speaking to reporters yesterday, he even opened the door to delaying the next round of tariff increases, due to take effect on 1 March.

If we’re close to a deal where we think we can make a real deal and it’s going to get done, I could see myself letting that slide for a little while,’ he said.

And as Bloomberg reports:

Extending the deadline could pave the way for a potential deal-clinching meeting with President Xi Jinping.

Xi is scheduled to meet key members of the U.S. delegation, including trade representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin, in Beijing on Friday…

I expect US and Chinese negotiators to emerge from this week’s meeting with enough progress to announce such a meeting between Trump and Xi.

Both leaders are exceptional showmen, after all. And both will want to bask in the media attention when they bring an end to the trade war they were responsible for starting in the first place.

In the lead-up to that meeting, likely in March, markets should head sharply higher.

Finally, don’t forget to check out the latest from The Australian Tribune:

‘Contentious Encryption Bill Could Smash Aussie Tech Industry’

Australia’s tech industry has the potential to be among the best in the world. But the federal government’s overreaching encryption bill has put that potential at risk.

The bill gives Australia’s intelligence and law enforcement agencies the power to force tech companies to decrypt messages the government suspects may be related to serious criminal activity.

The precise definition of serious criminal…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

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Cheers,
Bernd