The Chinese stock market is now in a bear market and there is a great deal of pressure on its currency. Last time there was this much pressure, in 2015, the market broke, with stocks plunging and the yuan devaluing by 7% over the year. US stocks even plunged in fear. Now, the situation looks like it might occur again, causing some to call the yuan the next “big short”. The currency is already down almost 1% since Friday, and is in negative territory for the year. A burgeoning trade war with the US is adding pressure.
FINSUM: So the one big support for the yuan is the current strength of the Chinese housing market, which has been strong recently (a big contrast to 2015). That seems like it will keep a blow out from happening.
Investors, be worried about the Fed, and not for the reasons you think. While all the market’s focus has been on how quickly the Fed will raise rates, what could really cause problems is the Fed’s unwinding of its balance sheet. According to the Indian central bank, this unwinding is sucking Dollars out of the system and causing a Dollar liquidity squeeze. According to Urjit Patel, the governor of India’s central bank, this Dollar-squeeze means “a crisis in the rest of the dollar bond markets is inevitable”, with a growing “possibility . . . a ‘sudden stop’ for the global economic recovery”.
FINSUM: It sounds like emerging markets are going to have increasing trouble issuing Dollar bonds, which could definitely throw a wrench into the recovery. Maybe this is how the Fed sparks a global recession and not just an American one.
Many advisors may have an interest in bitcoin, if not from an investing perspective, then at least from student-of-the markets perspective. With that in mind, we wanted to share a chart we found in Bloomberg today. The chart shows where the major growth in bitcoin trading has been this year. In other words, the regions that really drove the wild gains the cryptocurrency has seen this year. The top four countries are China, Nigeria, Colombia, and Venezuela. The idea is that countries which strict money controls, or less stable political and currency environments see more attraction to bitcoin.
FINSUM: The bitcoin rally has really been a product of emerging markets, which is a key factor for understanding its potential durability. We think this supports the idea that bitcoin may be able to maintain its price for some time.
We are rounding home towards 2018 and with that in mind, Goldman Sachs has published its top trade ideas for the new year. Goldman’s overall mantra for 2018 is “Late-cycle optimism”, and its seven trade picks all stem from that notion. Goldman’s bets are not very US-centric, and include shorting ten-year US Treasuries in advance of four rate hikes in 2018. It also says to go long the Euro, and emerging market credit (it is not favorable on US credit). Asian currencies will also do well, while metals seem like a good bet on the back of a strong economy.
FINSUM: This gives a good approximation of Goldman’s views, but we feel they are slightly over optimistic. Although the tightening cycle in the US may emerge.
For those who aren’t aware, there have been some major sweeping changes in Saudi Arabia over the last few days. In a broad move to consolidate power, The Saudi Arabian king’s son has had dozens of princes throughout the country arrested. The arrests are being done as part of an anti-corruption drive by Prince Mohammed, but they are raising international eyebrows about the business climate in the country, especially as Prince Mohammed has said he will bring great reform. The big flurry of arrests also come just prior to the IPO of state oil company Saudi Aramco, and many think these moves will accelerate the outflows from Saudi assets which have already been occurring.
FINSUM: This seems like a very counterintuitive move from a prince who says he wants to reform the country and transition it away from reliance on the oil sector. Saudi Aramco just took a huge valuation hit.