Total control of the stockmarket

Nick Hubble

Donald Trump has replaced central bankers when it comes to financial market news. Instead of trying to second guess what the money printers will do next, we await Trump’s tweetstorms.

And there’s been plenty of action lately. But first, consider where this leaves the world.

Between them, central bankers and politicians are dominating the long and short-term market moves. While quantitative easing was running hot, it pushed up markets. Since it fell on a net basis across all the central banks, markets went into a correction.

But now the markets have a new pilot. Day to day, Trump’s tirades on trade and the US Postal Service determine market moves. In Britain, it’s been much the same over Brexit negotiations. Even if our currency takes most of the burden.

Is this a healthy environment? Do you want the likes of Trump, Mark Carney and Jerome Powell running your wealth?

Let’s look at some of the recent action.

Trump has been on a Twitter tirade against Amazon. He alleges the company is piggy-backing off a sweet deal with the US postal service. The US government is effectively subsidising Amazon by providing cheap delivery.

Each time Trump targeted Amazon in his tweetstorms, the Amazon share price dropped. It was down $55 billion in six days.

The only problem is, Amazon is a huge part of the US stockmarket index. Trump usually takes credit for pushing up the stockmarket. Now he’s pushing it down.

But yesterday a Bloomberg headline turned the tables. According to the financial media company, Trump’s war of words is just words. There are no signs he actually wants to follow through with his threats. Such as to charge Amazon more for parcel delivery.

Five Bloomberg sources all confirmed there have been no discussions about the issue inside the White House. In fact, the Bloomberg story claims there’s no evidence the US Postal Service loses out on Amazon deliveries at all. But it goes on to provide just such evidence. Remember, Trump picks fights he wins.

Amazon shares jumped 1.5% when the Bloomberg report hit. And the wider market went with it. Before the article, stocks had failed to regain ground after Monday’s pummelling. They finished up 1.25%.

It’s not just Amazon that Trump is targeting. He’s on to China too. And that could prove far more important.

Trade wars escalate

The third round of retaliation in the trade war has arrived. First came solar panels and washing machines. Then steel. Now it’s intellectual property.

Under American law, Trump has authority over such policy. He doesn’t need congressional approval.

The latest policy is a 25% tariff on 1,333 products from China. At last year’s import levels, that affects $50 billion of products.

The Chinese embassy came up with a fascinating reply:

“Such unilateralistic and protectionist action has gravely violated fundamental principles and values of the WTO. It serves neither China’s interest, nor U.S. interest, even less the interest of the global economy.

“As the Chinese saying goes, it is only polite to reciprocate. The Chinese side will resort to the WTO dispute settlement mechanism and take corresponding measures of equal scale and strength against US products in accordance with Chinese law.”

In other words, it’s illegal, mutually harmful and rude. So we’re going to do it too…

The recent jumps in stockmarket volatility seem to be about these trade wars. Each announcement moves the market. And so, if they continue, the markets could go on falling.

But if the politicians and central bankers of the world can make markets go up, and they can make them go down, then where does that leave us overall?

Surely it suggests a crash is unlikely. Trump and his Federal Reserve chairman would just spring into action. The same goes for emergency Bank of England policies after Brexit.

Is there anything they could lose control over? I can’t find such a crack in the dam. But if it was obvious, it would’ve already burst.

China’s oil market isn’t about oil

Yesterday we took a look at China’s new oil futures trading exchange. My friend Shae Russell had some fascinating points to add in the Daily Reckoning Australia – Capital & Conflict’s sister publication Down Under.

It’s their job to watch China closely given Australia is practically a Chinese mining province when it comes to trade.

Here’s a section of what she wrote:

The media likes to remind investors that China will be heavily ‘monitoring’ how the yuan oil futures trade. That’s a nice euphemism for ‘manipulating’.

There’s no doubt that China is keen to establish some sort of crude pricing dominance in the global market. But they’ll twist and contort their yuan oil futures market along the way.

The pervasive government oversight could prevent Chinese yuan oil futures becoming a genuine oil benchmark.

And the presence of the all-knowing, all-watching and all-seeing Chinese government could potentially lead to a lack of trust in yuan oil futures.

Then again, yuan oil contracts are not about setting a new benchmark.

Instead, yuan-denominated futures contracts are about spreading the yuan throughout the financial system.

Right now, few people want yuan, except locals. At present, only 16% of Chinese trade is settled in yuan. And that’s inside China. Global share of yuan payments for trade sits at 1.78%, way behind the US dollar, euro, pound, yen and the Canadian dollar.

The US dollar dominates the international payments system.

All of which is to say that China’s yuan oil contracts are about upsetting the US dollar power structure.

Spreading the yuan into the financial system is one step towards building credibility for the currency.

For now, there remains broad trust, however flagging, in the US dollar, and very little in the yuan. Pushing more yuan into the financial system may encourage more people to accept it.

Either way, one thing seems clear: Trump may be keen on ramping up his trade war with China. But China’s out to destroy the US dollar.

What this puts into focus is the blurry line between trade wars, economic wars and proper wars. If countries start to use their economic power as a weapon, the subsequent retaliation is a violent one.

On the one hand, the interdependence of globalisation makes conflict less likely. On the other, it makes blackmail and escalation more likely because it’s so effective. That’s what Trump has figured out.

Escalating trade tensions into economic warfare is one of the few ways out the world has. Trade deficits and debt levels are dangerously high. If a priority greater than prosperity can be found, we can reset the financial system. And nationalism is the go to priority in such situations.

If China tries to use its holdings of US government debt to harm the US, they’ll find themselves defaulted upon.

China’s oil trading market is a step to set up a functioning financial system outside of US dollar control. So they don’t shoot themselves in the foot if they attack the dollar.

More than ever, energy markets like oil are the key to geopolitics. It’s time to understand them if you want to be able to predict what’s going to happen when it comes to the likes of Russia, Syria and even Brexit Britain.

The team at Southbank Investment Research is putting together the best possible introduction. It’s a tour of all the best ideas and analysis in energy market research. Sign up here for free.

Until next time,

Nick Hubble
Capital & Conflict

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Category: Geopolitics

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