‘Selfish’ demands wipe billions from markets

Thursday, 21 November 2019
Adelaide, Australia
By Bernd Struben

  • Strong countermeasures
  • Russia’s crude nuances

Darn those protesters in Hong Kong!

Demanding basic democratic rights. Refusing the Communist Party’s request to extradite their fellow citizens suspected of crimes. What’s so wrong with being prosecuted in China’s transparent, fair-minded judicial system anyway?

And while we’re at it, darn those Muslim Uighurs!

Stubbornly practicing their religion and ancient culture. Thumbing their noses at Xi Jinping. Forcing the Chinese president to lock them up in ‘re-education camps’ by the millions.

Don’t they know they’re throwing a wrench into the highly anticipated ‘phase one’ of the US–China trade deal?

Don’t they know global markets have already begun to price in the success of said new deal?

Their selfish demands are costing investors billions!

OK.

Perhaps the finger of blame should point elsewhere.

That, at least, is the message coming out of Washington DC.

On Tuesday, the US Senate unanimously passed a bill titled the ‘Hong Kong Human Rights and Democracy Act’.

Yesterday (overnight our time) the US House waved the bill through 417–1.

Speaker Nancy Pelosi (quoted by Bloomberg) offered the following:

The Congress is sending an unmistakable message to the world that the United States stands in solidarity with freedom-loving people of Hong Kong and that we fully support their fight for freedom. This has been a very unifying issue for us.

Unifying or not, this puts Trump in an awkward position. He’s been banking on signing off on the first part of the trade deal. But he can’t afford to be labelled soft on China by vetoing the bill. And, in either case, Congress only needs a two thirds majority to override a veto. Numbers they clearly have.

Which makes Trump’s signature an almost done deal.

And that prospect, folks, sees every major stock index in the world in the red today.

More, after a look at those markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 112.93 points, or 0.40%.

The S&P 500 closed down 11.72 points, or 0.38%.

In Europe the Euro Stoxx 50 index closed down 12.68 points, or 0.34%. Meanwhile, the FTSE 100 lost 0.84% and Germany’s DAX closed down 62.98 points, or 0.48%.

In Asian markets Japan’s Nikkei 225 is down 210.65 points, or 0.91%. China’s CSI 300 is down 0.58%.

The S&P/ASX 200 is down 51.62 points, or 0.77%.

West Texas Intermediate crude oil is US$57.11 per barrel. Brent crude is US$62.40 per barrel. (More on crude’s price spike below…)

Turning to gold, the yellow metal is trading for US$1,474.00 (AU$2,167.65) per troy ounce. Silver is US$17.18 (AU$25.27) per troy ounce.

One bitcoin is worth US$8,078.85.

The Aussie dollar is worth 68.00 US cents.

Strong countermeasures

China, as we know all too well in Australia, doesn’t take kindly to outsiders poking their noses into what it believes are its domestic affairs.

And China’s Foreign Ministry spokesperson Geng Shuang didn’t waste any time venting the Middle Kingdom’s displeasure following the Senate’s vote on Tuesday.

From Bloomberg:

The U.S. should immediately stop interfering in Hong Kong affairs and China’s other internal affairs, or the negative consequences will boomerang on itself… China will have to take strong countermeasures to defend our national sovereignty, security and development interests if the U.S. insists on making the wrong decisions.’

It’s almost inconceivable that US lawmakers will back off here.

At the very least that puts the current trade negotiations at serious risk of delay. Or it could see the trade war flare up to new heights.

Or it could get far nastier.

China’s foreign ministry’s office in Hong Kong issued a statement yesterday saying, ‘Don’t say I didn’t warn you.’ An ominous Chinese phrase that’s often the prelude to serious conflict.

So how can China retaliate?

One of China’s most powerful economic weapons remains its virtual stranglehold on rare earths. The basket of 17 metals is vital for the production of most every tech item you can imagine. Xi’s well-publicised visit to Chinese rare earths producers earlier this year sent a clear message he’s well aware of the leverage he has here.

The US military is wholly dependent on rare earths for all its modern toys. Not to mention the US consumer electronics markets. Yet the US produces no rare earths within its borders.

Could Xi move to restrict exports?

Absolutely.

But even if he doesn’t take this drastic step, the West has woken up to China’s potential to do so.

Now the US and Australia are rushing to break China’s virtual monopoly.

From The Sydney Morning Herald:

On Tuesday, Federal Resources Minister Matt Canavan announced an agreement had been signed between Geoscience Australia and the United States Geological Survey…

“Growing global demand for critical minerals means there is huge scope for Australia to develop secure and stable supply chains to meet the growing demand for critical minerals in key economies such as the US,” he said.

“The US has a need for critical minerals and Australia’s abundant supplies makes us a reliable and secure international supplier of a wide range of those, including rare earth elements.” …

“This partnership has the potential to lead to the development of new rare earths mines in Western Australia and further trade between the two countries…”

This is precisely what Sam Volkering and analyst Ryan Clarkson-Ledward have been predicting would happen.

They detail it all in their research report, here.

And they highlight three off-radar Australian miners they’re convinced are best placed to gain from the rush to make Australia a reliable rare earths producer.

Click here for the full report.

Russia’s crude nuances

Getting back to oil…as promised…

Both crude oil benchmarks we track here rose sharply overnight.

WTI’s 3.5% price spike erased the previous day’s losses. The rise comes on a surprise drawdown of US stockpiles.

Crude still has the potential to tick slightly higher from here. But — barring a full scale Persian Gulf conflict — I still believe we’ll see WTI fall below US$50 per barrel in early 2020.

It’s a simple supply and demand equation. The world has enough crude supplies readily on tap to meet even the most robust demand expectations.

The US, Saudi Arabia and Russia are the world’s biggest producers. The US is pumping flat out. They hit new production records this year, with output expected to keep growing through at least 2023.

The Saudis — undoubtedly with one eye on the Aramco float — are the only one of the three seriously trying to stem the supply glut.

The Russians are paying lip service to their OPEC+ production cut agreement. But as you can see in the graph below their follow through is lacking:



chart image
Source: Bloomberg
Click to enlarge

The dip you see in May and June actually took Russian output below its agreed level. But it wasn’t exactly voluntary. The sharp decline was due to contamination issues in its largest crude export pipeline.

According to Bloomberg and government data, Russia’s been pumping an average 54,000 barrels per day more than agreed this year.

I expect that trend to continue or increase next year. Which will only up the incentives for other cartel members to exceed their limits as well.

As for Russia’s failure to date?

Speaking to reporters in Moscow yesterday, Energy Minister Alexander Novak offered this non-explanation, ‘We’re trying to reach the planned level. There are certain nuances that, as we’ve said before, have an impact during winter season.’

I expect these ‘nuances’ will persist if not flourish in 2020. And oil will head lower.

Cheers,
Bernd