What’s next for these booming markets?

Monday, 1 April 2019
Adelaide, Australia
By Bernd Struben

  • Higher-gushing wells
  • In the mailbag
  • ‘Labor’s Wage Plan Could Backfire on Young Workers’

For all the fears of implosion, global markets are on a tear in 2019.

The ASX 200 gained 11.2% as of market close on Friday. That marks its best quarterly performance in 10 years. And at time of writing the index is up another 0.64% in intraday trading.

Over in the US, the Dow Jones tacked on a similarly impressive 11.1% since 2 January.

Brexit worries and shaky debts among the southern nations were also brushed aside by European investors. Germany’s DAX, for example, is up 8.9% in the first quarter.

But the star performers, hands down, have been Chinese stocks. China’s CSI 300 is up an eye-popping 30.4% in 2019. And as I pen this the CSI is up another 2.31% in intraday trading today.

Should all of this inspire fear…or greed?

I’d say a bit of both.

Much if not most of the market gains we’re seeing is based on loose money and ever more debt.

Granted, that’s not sustainable.

At some point the bill will come due and the markets will come tumbling down. That’s about as sure of a bet as there is. The big question remains when.

Exiting the markets today is a bit like leaving a booming party in mid swing. You know things are going to turn ugly in a few more hours. But in the meantime, why not make the most of it?

In the case of the stock markets, those few more hours of good times could mean months…or much longer…before the global debt hangover really kicks in.

Though Chinese stocks have enjoyed the biggest gains, on average, this year, it doesn’t mean their stellar run is over.

There are a few things that could see the China bull run continue apace.

First, the Chinese government has opened up the stimulus taps again. And it’s paying off. China’s manufacturing sector picked back up in March. The manufacturing purchasing managers index climbed to 50.5 from 49.2. That’s its biggest monthly gain in seven years.

And as Bloomberg reports:

Premier Li Keqiang told business people last week that March economic indicators would show “signs of visible improvement,” with the economy doing better in the first quarter than the government expected.’

Another big potential boost could come from a resolution in the trade war with the US.

I’d forecast that this would all be done and dusted heading into April. Clearly that was a bit optimistic. But I still believe US President Donald Trump and Chinese President Xi Jinping will make it happen.

At the end of last, the two sides inched even closer to a resolution. Also from Bloomberg:

Chinese and U.S. negotiators made “new progress” in trade negotiations as both sides discussed the wording of an agreement that’s designed to resolve a bilateral trade dispute, according to Beijing’s official news agency Xinhua.

The report echoed officials familiar with the talks who said negotiators have been working line-by-line through the text of an agreement that can be put before President Donald Trump and his Chinese counterpart Xi Jinping.’

Xi and Trump both have a lot of skin the game here. If the talks collapse and the trade war flares up rather than disappears, both men will lose a lot of political capital. Which is why I still expect them to announce a ‘great’ new deal sooner than later. An announcement that very likely will see the Chinese market head sharply higher.

One way to play a rising Chinese stock market is via the iShares FTSE/Xinhua China 25 Index [NYSEARCA:FXI]. I’ve mentioned this ETF to you before.

It holds 10 of China’s largest stocks, and is intended to track the performance of large-cap Chinese stocks. FXI is up 14.2% year-to-date. That’s far less than the 30.49% gain made by CSI 300.

But while China’s blue chip stocks won’t generally gain as much as the smaller companies, they’re also less likely to lose as much. The old risk reward trade-off at play for you.

Look, anything could happen with Chinese markets over the course of 2019. They certainly could take a sharp fall.

But if you believe the government stimulus will prop up share prices and Xi and Trump will finally make nice, you might want to consider an ETF like FXI.

Now a look at the markets…

Markets

Over the weekend, the Dow Jones Industrial Average closed up 211.22 points, or 0.82%.

The S&P 500 gained 18.96 points, or 0.67%.

In Europe the Euro Stoxx 50 index finished up 31.42 points, or 0.95%. Meanwhile, the FTSE 100 added 0.62%, and Germany’s DAX closed up 97.88 points, or 0.86%.

In Asian markets Japan’s Nikkei 225 is up 408.72 points, or 1.93%. China’s CSI 300 is up 2.31%.

In Australia, the S&P/ASX 200 is up 39.37 points, or 0.64%.

On the commodities markets, West Texas Intermediate crude oil is US$60.39 per barrel. Brent crude is US$67.90 per barrel. (More on oil below…)

Turning to gold, the yellow metal is trading for US$1,291.86 (AU$1,841.83) per troy ounce. Silver is US$15.14 (AU$21.59) per troy ounce.

One bitcoin is worth US$4,095.53.

(Does bitcoin’s move above US$4,000 signal it’s about to run far higher? Or is it all downhill from here? Don’t invest blindly. Stay atop the latest crypto investing advice here.)

The Aussie dollar is worth 70.14 US cents.

Higher-gushing wells

Getting back to oil, regular readers will know that at US$60.39 per barrel, WTI just crossed over into what I believe is overvalued territory.

Anything above US$60 could represent a good shorting opportunity, meaning you gain if the oil price falls.

There are all kinds of ways to short crude and most any other commodity. Contracts for differences (CFDs) are one. Options are another.

But one of the simpler ways is through inverse exchange traded funds (ETFs). These funds are set up to deliver (roughly) the opposite price movement of the underlying commodity they track. And you can buy and sell them just like you would shares in any other stock.

In the case of crude there are a number of inverse ETFs to choose from…if you believe the price of oil is coming down. The ProShares UltraShort Bloomberg Crude Oil ETF [NYSE:SCO] is one you could consider. It’s a double leveraged ETF, meaning it carries more risk in return for potentially higher returns.

With that said I wouldn’t rush off to short crude just yet. Better to wait and see if angst over supply disruptions from Venezuela and Iran manage to drive the price higher first. Not to mention investors’ beliefs that OPEC can stem the rising tide of oil from ever reaching global markets.

While those factors could see crude trade higher, I expect a big pull back.

Longer term, the supply of oil is simply greater than the demand. And that supply is only going to grow. That’s partly due to the fracking boom in the US. But traditional drilling is making a resurgence too.

As Bloomberg reports:

While U.S. shale remains a global hot spot, with multibillion-dollar investment plans from supermajors Exxon Mobil Corp. and Chevron Corp., independent producers have been under pressure from investors to focus on delivering returns rather than ambitious growth plans. At the same time, after nearly half a decade of consecutive spending cuts, the offshore industry is expected to finally boost spending again to develop higher-gushing oil wells.’

You can see the forecast resurgence in offshore drilling in the chart below:



chart image

Sources: Rystad Energy UCube / Bloomberg
Click to enlarge

As new ‘higher-gushing’ oil wells come into play, it’s hard to envision the Russians gamely sticking to any production cut agreements as part of its membership in OPEC+.

In fact, the Russians haven’t even committed to extending their current cuts beyond June.

While the Saudis have managed to cut more oil from the market than they’d originally pledged, pressure from — you guessed it —Trump is building for them to reverse course.

You can see the tweet he sent on Thursday below:



chart image

Source: Twitter
Click to enlarge

Trump doesn’t mention Saudi Arabia specifically. But the Saudi royals will undoubtedly get the message. They remain highly reliant on US military aid and political support to maintain their regional power.

While the US Congress is souring on the relationship with Saudi Arabia, Trump is still a firm backer. And the royals still owe Trump for backing prince Mohammed Bin Salman following the murder of journalist Jamal Khashoggi at the Saudi embassy in Turkey.

Adding it all up, I expect WTI to be back in the mid US$50 range or lower by July. But it could nudge higher yet over the coming weeks, which would represent an even better opportunity to short crude.

One to keep an eye on…

In the mailbag

On Thursday I asked readers to let us know their thoughts about the push for 100% renewables and abandoning thermal coal. I also asked if you are comfortable investing in coal miners.

Here’s the reply we got from reader William:

I am happy to invest in coal mines. The notion that MANKIND can influence the temperature relative to what the sun et al has done for quite a few years fairly successfully is the ultimate arrogance. The theory is just that and in my view, the promotion of the idea is in line with the Marxist plan to interrupt and take over, which has been at the core of the divisive arguments regarding our current successful way of life.

In order to replace it in their own image they first have to destroy what we have. Coal is one line of attack and the interrupters have no hesitation of using children in their efforts. What kind of people are they? When “believers” become “knowers” because the theory has become an incontestable FACT, then I am on board. Till then it’s a con job. But then the “renewable” industry has become so powerful and money hungry that any hope of honesty from that quarter is like finding a black cat in a dark room.’

Thanks William.

It does appear to have been a race from theory to ‘fact’ on this one. Best to keep the data flowing with an open mind yet.

And you’re not alone when it comes to investing in coal mines. The demand for coal, after all, is booming.

I’ll leave you with this snippet from today’s Australian:

New analysis [from Coal Services] shows growing global demand has more than doubled NSW coal export volumes since 2001, from 75 million tonnes to more than 164 million tonnes last year…

The International Energy Agency has forecast that growth in demand for coal in the Asia-Pacific region is expected to more than double by 2040.’

That’s all for today. Don’t forget to send your thoughts to letters@portphillipinsider.com.au. If we publish your email we’ll on print your first name.

Finally, here’s the latest in politics from The Australian Tribune:

‘Labor’s Wage Plan Could Backfire on Young Workers’

There is widespread agreement among the major parties that every full time worker should be able to live comfortably on their wages. There is far less agreement on how to achieve this.

Union calls to substantially lift minimum wages and Labor’s ‘living wage’, for example, sound…

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.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd