Brace for Trump’s trade war double down

Wednesday, 7 August 2019
Adelaide, Australia
By Bernd Struben

Publisher’s Note: You’ve no doubt noticed a few changes here at Port Phillip Publishing (PPP) in recent weeks. Over the last two months, we’ve been refocusing our services to ensure you’re getting the best quality research we can provide. There have also been other changes going on behind the scenes, namely to the leadership of the company.

So, without further ado, let me introduce myself. My name is James Woodburn, and today I can officially announce that I’m now the Group Publisher of PPP. Our core mission is still the same as when we first started out in Australia: to bring you ideas that make you smarter, happier and, hopefully, wealthier. So, get ready…big things are coming. We hope you’re as excited to be part of it as we are.

 
James Woodburn

James Woodburn

***

Analysts are coming out of the woodwork to predict the next move in the US–China trade war. Your editor among them.

You need look no further than the market action over the last few days to understand why.

Correctly forecasting Donald Trump’s or Xi Jinping’s next move can help you avoid — or actually profit from — some of the steep losses we witnessed on Monday and Tuesday. That rout saw the ASX 200 drop 4.2% in two days. And as we covered yesterday, many tech stocks lost far more than that.

Get it right and you can also take advantage of any rebound when sentiment takes a turn for the positive. Don’t forget that even after this week’s losses, the ASX 200 is still up 16.6% since 2 January. Try getting that from cash or bonds…

With investors around the globe on edge, Kerry Craig, global market strategist at JP Morgan, offers the following (as quoted by the Sydney Morning Herald):

It’s worth noting that the [Donald Trump] has, in the past, used the level of the stock market as a barometer of political success, so signs of a material downturn may be met with a more amenable stance towards China.’

No offence to Kerry here. But has Trump ever flipped to ‘a more amenable stance’ when faced with hostile opponents?

I believe not.

First, he’ll blame any market downturn on Fed Chairman Jerome Powell for not cutting interest rates fast or far enough.

Then he’ll double down in his confrontation with Xi.

If you’re not familiar with that term, it comes from a high risk high reward option in Blackjack. In a nutshell it enables you to double your bet after your first cards have already been dealt. The caveat being you only get one more card.

Now, Trump won’t be limited to one more card in the trade war game. But I do think he’s plotting to up the stakes even as you read this.

Maybe I’m wrong here. But Trump’s been suspiciously muted (relatively speaking) since China announced a halt to US agricultural purchases. That’s a slap I can’t see Trump letting go and instead taking on a more amenable stance. Not when they’re stabbing good old American farmers.

I think he’s plotting something big. Expect a new bombshell.

But in what form?

I reckon before the end of the week, Trump will announce one of two measures.

One, a new set of even higher tariffs on Chinese imports to counterbalance any devaluation of the yuan. In theory there’s no limit to Trump’s tariff reservoir, while China can only devalue so much before causing major self-harm.

Or two, he can order the US Treasury to utilise its Exchange Stabilization Fund (ESF). As its name implies the ESF — with some US$100 billion in it — enables the Treasury to intervene in foreign exchange markets when it has evidence of currency manipulation. In short, the ESF could be used to devalue the US dollar to match any moves by China.

And, sorry Democrats, its use is wholly independent of Congress.

The first option looks to be the most likely. But either way I believe the overnight market bounce in US stocks and currently underway in Australia is set to reverse when Trump proves anything but amenable in his dealings with China.

Let’s have a look at those markets now…

Markets

Overnight, the Dow Jones Industrial Average closed up 311.78 points, or 1.21%.

The S&P 500 closed up 37.03 points, or 1.30%.

In Europe the Euro Stoxx 50 index finished down 19.27 points, or 0.58%. Meanwhile, the FTSE 100 fell 0.72%, and Germany’s DAX closed down 90.55 points, or 0.78%.

In Asian markets Japan’s Nikkei 225 is down 86.71 points, or 0.42%. China’s CSI 300 is up 0.02%.

In Australia, the S&P/ASX 200 is up 39.91 points, or 0.62%.

West Texas Intermediate crude oil is US$53.51 per barrel. Brent crude is US$58.81 per barrel.

Both benchmarks slipped again overnight. Brent’s fall sees it enter bear market territory, generally accepted as any decline over 20%. Brent is now down 21.7% from its 24 April peak of US$74.57.



chart image
Source: Bloomberg
Click to enlarge

With global demand growth slowing and a flood of supply waiting to be tapped, crude prices are right where I expected them to be…given that OPEC+ is still restricting output. (Prices would be far lower if the cartel’s member states started pumping in earnest.)

But let’s not take our eyes off the oil rich Persian Gulf…and that infamous narrow passage, the Strait of Hormuz.

The UK confirmed it is sending additional warships into the Gulf, mirroring moves by the US Navy. Australia has yet to confirm it will pitch in its own ships or planes to help protect tankers from hostile Iranian forces. But I expect that news any day.

Soon, the waters will be chock-a-block with warships from a new ‘coalition of the willing’. Any missteps — whether from that coalition or from Iran’s Revolutionary Guard — and things could get very ugly, very quickly. And if shipments through the Strait of Hormuz are disrupted, crude’s bear market days would disappear just as fast.

Turning to gold, the yellow metal is trading for US$1,479.23 (AU$2,184.33) per troy ounce. Silver is US$16.53 (AU$24.41) per troy ounce. That’s another 0.8% rise in the price of bullion in Aussie dollars since this time yesterday. And gold’s bull run looks like it has a lot further to run.

(To get the inside scoop on why gold could go much higher…and four stocks to buy now to potentially profit from it…click here.)

In the world of cryptocurrencies, one bitcoin is worth US$11,491.54.

The Aussie dollar is worth 67.72 US cents.

The envy of the global cannabis market…

It’s no secret that Australian agricultural products are valued in Asia for their high quality and decided lack of pesticides and other nasties.

Hence the voracious demand for Aussie manufactured baby formula. And the booming market for Australian wines…to name a few.

Could this same trend play out in the rapidly growing medicinal cannabis industry?

It certainly makes sense. And two companies currently developing a growing operation in Australia to export cannabis into Asia are banking on it.

Australia’s Greenfield MC and US–Canadian firm Emerald Plants Health Source (EPHS) are forming a joint venture business called Greenfield MC Cultivation, according to Business Insider Australia.

And as the AFR reports:

EPHS — which is licensed to grow and distribute cannabis in Canada and listed on the New York-based OTC stock exchange — is anticipating the Asia-Pacific medicinal cannabis market will become the world’s largest as demand for cannabis-based treatment grows.

“Australia’s reputation for best agricultural practices, crop safety management systems and robust quality control will make Australian-grown cannabis the envy of the global market and provide patients with confidence in this new form of medical treatment,” said Kevin Smith, vice president for strategy and business development at EPHS.

“For those very reasons, we see Australia as the gateway to Asia, which it already is in various agricultural and pharmaceutical product categories.”

Medicinal cannabis is fast gaining a foothold in Asia, where patients have long turned to natural medicines. London-based Prohibition Partners estimates the Asian medicinal cannabis market will be worth US$5.8 billion by 2024.

That’s a lot of weed that can potentially be grown and processed right here in Oz. And a lot of potential profits still sitting on the table for early investors in the right Aussie pot stocks.

Which stocks are those?

You can find out pot stock analyst Sam Volkering’s top two ASX listed cannabis plays here.

Cheers,
Bernd

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