2019-05-21

Huawei Isn't Run By Fools

Can't say the same for companies that are shocked and unprepared for a trade war, or the U.S. government which failed to secure alternative rare earth supplies even after China used them in a trade dispute with Japan.

Caixin: Blame U.S. Politicians, Not Companies, Huawei Founder Says, Dismissing Blind Nationalism
“It is wrong to say that purchasing Huawei’s products equals being patriotic … don’t link that with politics,” said Ren Zhengfei in a group interview in Shenzhen on Monday with multiple Chinese media, including Caixin. “At Huawei, we won’t resort to nationalism and populism, because that is harmful to our country,” he said.

Ren said the measure had “little meaning” to Huawei, and his company had anticipated future conflict with the U.S. and the company had been working on a backup plan to develop its own chips for many years. He said Huawei had long prepared for clashes with the U.S.

“We have sacrificed individuals and families only for the goal to stand at the top of the world,” Ren said, adding that with such a goal, conflict with the U.S. was “inevitable.”
The market is reacting to trade news now, but it hasn't accepted that the horse has left the barn. China will accelerate its homegrown technology now. Stock buybacks are coming to an end, capital investment and research is about to get a lot more expensive as labor costs soar and national security concerns start dominating decision making.

Trade War Makes New Winners and Losers

Caixin: Tariffs ‘Catastrophic,’ Footwear Giants Tell Trump
Nike Inc., Adidas AG and other footwear giants urged U.S. President Donald Trump to reconsider his tariffs on shoes made in China, saying the policy would be “catastrophic for our consumers, our companies and the American economy as a whole.”
If shoe prices go up and people are inelastic in their shoe demand, the higher price boosts retail sales in the U.S. If some shoe production moves back to the U.S., GDP gets a boost. If consumers don't buy as many shoes and consume other American made goods and services, the economy gets a boost. If instead they buy shoes from Vietnam, there's no major impact on the U.S. economy.

There are winners and losers in the trade war, as there were losers and winners from the expansion of trade. Globalization is in retreat, the future is trade blocs and/or increased local production. This letter from the shoe companies is akin to a strike by American steelworkers or autoworkers in the 1970s.

Interest Rate Reform Takes a Step Forward

Caixin: Central Bank Reveals First Step to Unifying Benchmark, Market Rates
China’s interest rate liberalization is now focused on unifying the “two tracks” of lending rates, the People’s Bank of China (PBOC) said Friday in its latest quarterly report.

The report’s release marks the first time that the central bank has signaled how it will unify the two tracks — one is benchmark rates set by the bank, while the other refers to the ones chiefly set by the market. The PBOC looks likely to first try to merge lending rates instead of deposit rates.

Although benchmark rates are reference rates that are no longer compulsory, they continue to loom large in the minds of bankers and borrowers. Combining benchmark and market-based lending interest rates allows commercial banks to price loans on their own, with lower rates for lower-risk companies and vice versa. This can help enhance market competition, the PBOC said in the report (link in Chinese).

The merging of interest rates sits at the core of China’s interest rate liberalization, which in turn is one of the key reforms to the country’s financial sector.
It's a good bet that banks won't set loan rates based on risk until after the next financial system reset.

Rare Earths Again

VanEck Rare Earth (REMX) has a chunk of China exposure, naturally. The companies best positioned to profit from an export ban or export quotas are Western companies that will sell into the global spot market. LYSCF is high risk here, the potential downside move equals the upside, risk is a move down to $1.00 or up to $2 resistance. If it were to climb back to $2.00, another breakout becomes possible.

You may also want to look into REMX's holdings if capital starts flowing into REMX. The fund is relatively concentrated because this is a small space. REMX is a big funnel for moving cash into relatively small stocks. REMX has $140 million under management, but top holdings around 5 percent of assets are in the range of $1 to $3 billion market caps. I don't think there's a lot of upside outside of a China trade war though, at least not in the short-term.

Lynas spiked on Monday because Australia's Lynas, Blue Line plan Texas rare earths facility
Rare earths producer Lynas Corp said on Monday it has signed a memorandum of understanding with Texas-based Blue Line Corp to set up a rare earths separation facility in the United States.

The move comes as the United States, which is highly reliant on the world's biggest producer China for rare earths, is prioritising the sourcing of its own strategic minerals used in everything from consumer electronics to military equipment.

The deal has been struck as Lynas faces regulatory issues at its processing plant in Malaysia, and fends off a $1.1 billion takeover offer from Australian retail-to-chemicals conglomerate Wesfarmers Ltd

Chief executive officer Amanda Lacaze told Reuters in a phone interview that the U.S. venture was a specific market opportunity and would complement its operations in Malaysia.

The venture would allow Lynas to close a "critical" supply chain gap for U.S. manufacturers.

2019-05-20

China and US Still Finger pointing on Trade Talks

iFeng: 特朗普指责中方破坏“协议”?外交部:美方又想混淆视听转嫁责任
Sogou: Trump Accuses China of Breaking the "Agreement"? Ministry of Foreign Affairs: U.S. Again Wants to Confuse and Pass on Responsibility
On May 20, Foreign Ministry Spokesperson Lu Kang held a regular press conference.

Q: It is reported that US President Trump said on the 17th that the US and China actually have an agreement, but China has broken it. What is China's comment on this?

A: I don't know what the United States means by "agreement". The U.S. side may have always had an "agreement" of its own wishful thinking, but it is certainly not an agreement that China has agreed to.

The 11 rounds of economic and trade negotiations between China and the United States failed to reach an agreement. The fundamental reason is that the United States is trying to realize unreasonable interests through extreme pressure. This did not work from the beginning. Under the circumstances that the blackmail failed and caused widespread doubts and market turmoil in the United States and abroad, the United States tried to confuse the public and shift the responsibility, which was also futile. The sincerity and constructive attitude shown by China in the past 11 rounds of negotiations are obvious to the international community.

I would like to reiterate once again that Sino-US economic and trade negotiations can only succeed if they follow the correct track of mutual respect, equality and mutual benefit.

The 2019 Pivot in Asia and Freegold Too

Last year I posted 2018: The Pivot Year and Dollar Breaks Again. I also did similar posts around 2015 or 2016. The posts were based mainly on technical analysis, with charts indicating a possible shift in market direction. Commodity charts and commodity producing countries had inverted head & shoulders patterns completing back in 2016. Last year and this year, there are false breakouts that reversed. Last year, I stuck with my macro position on dollar strength despite some dollar weakness and chart breakouts and it was the correct one.

Right now, the number one chart is still the U.S. Dollar Index, but for now the most important "subchart" is the offshore yuan, USDCNH. The PBoC chief drew another redline at 7.00. 人民币会“破7”吗?刚刚,央行副行长给了颗定心丸! For myself, a move through 7 to 7.25 or 7.50 is fine if it is driven by the U.S. dollar. If DXY is above 100 or at 105, USDCNY 7.25 signals nothing more than dollar fluctuation. Yet the PBoC has boxed itself in with a narrative here. The risk isn't that CNY goes through 7 as much as the "ominpotent PBoC" "they have reserves and can force the market whichever way they want" narrative dies.
iShares MSCI Emerging Markets (EEM). The red horizontal is from the 2011 top, the blue from 2007. Prices are $40.01 currently and $39.72. A break below these levels could invalidate the 2017 breakout. Support is down near $34 if it breaks. EEM is trading at $40.11 in pre-market on Monday.
Trade is the big story and South Korea is an economy that lives and dies by global trade. ROK's trade surplus was 8 percent of GDP in 2017, exports and imports combined for 70 percent of GDP. The target for USDKRW, if that's a completed H&S pattern, is 1250. If USDKRW makes it there though, it's likely there's breakdowns elsewhere, such as USDCNH. As for the iShares MSCI South Korea ETF (EWY), it has a failed breakout, major support around $45. EWY is below its 2018 low.
Below are several Southeast Asian ETFs. Indonesia (EIDO) is close to have a major test of support.
For "corroboration" here's the S&P 500 Index. The blue line is the trendline from the 2009 Satanic low of 666. It must recapture 2895.
Finally, here's the ratio of GLD to SLV, and GDX to SIL.
I won't rehash the topic here, but in quick and simple terms, freegold is the "freeing" of gold away from a medium of exchange and into more of a monetary asset, mainly a reserve asset that might be likened to Bitcoin's role in the cryptocurrency ecosystem (if transaction speeds never pick up). Gold is money as they say, whereas even silver has substantial industrial demand. The exchange rate for money/currency can be set an any amount. The dollar can equal 100 yen or 1,000,000 yen, and the economies adjust around that exchange rate. Obviously a transition from 100 to 1 million between dollar and yen would wreck the Japanese economy, but the initial exchange rate doesn't matter. Had they set it in the millions, we'd all be saying USDJPY 1 million. The same is almost true of gold (it does have some industrial users that will be upset by a soaring gold price) because it is money. Moreover, if all fiat currencies crash versus gold, the economy suffers a less disruptive adjustment because relative prices and exchange rates won't be as directly impacted they way they would if a similar collapse took place against oil or agriculture. USDJPY is 100 and gold is $1300 an ounce and USDJPY might be 120 if gold is $5000 an ounce. Finally, soaring gold valuations life central bank reserves, shrinking their debt levels and allowing them to restart the credit system.

In practice, freegold will be visible in the price of gold breaking away from silver, other precious metals and all commodities. The gold/silver ratio
Since this chart is about pivots, this might also be a great time to be buying silver. It might be a great time to buy emerging markets if you think the dollar is peaking. Both the silver and EM trade should be powered by global inflationary forces. Or maybe the larger trend is still in place, but it's time for a short-term trend reversal. If instead there's a breakdown in emerging markets and gold takes on greater monetary status, it is likely deflation is out of control again. Currency volatility will take off. For myself, I'm still leaning towards a higher U.S. dollar and trouble ahead.

2019-05-18

Another Election Shock in Australia, Brexit Party Surges in Westminster Poll

Labor was expected to win, but instead the Liberals have hung on to a divided government.

AFR: The ultimate election guide
There is no overriding national mood for change but nor is there a strong appetite for the status quo, leaving it a seat-by-seat race with local issues, sentiment and candidates playing a critical role. Labor has long been ahead in opinion polls but the race has tightened.
The division is clearest in the Senate.

AFR: Election 2019: Coalition vote surges, Labor cannot form government
The new Senate

Political Editor Phil Coorey says the Senate count, while not final, looks like:

34 LNP Senators,
27 Labor,
nine Greens,
two One Nation,
two Centre Alliance
Jacqui Lambie and Cory Bernardi.

The government needs five extra votes to secure the 39 votes needed to secure its tax cuts and other legislation.
Note that if Labor shifted on immigration, it might have enough votes to take the Senate. Something to think about moving forward given Denmark's shift. In many countries there is dividend government because the two main parties/coalitions refuse to budge on issues that have rising support with the public, which leads to not only surprise elections, but surprise governments.

AFR: The biggest losers in a shock election result
This year's election has produced plenty of big losers: Bill Shorten, Tony Abbott, Clive Palmer, SportsBet.

But one of the biggest will be opinion pollsters. All the major media polls including The Australian Financial Review's Ipsos, Newspoll and Nine's election day exit poll all put Labor's two-party preferred lead at 51-52 per cent.

...However, there is one aspect where the polling was accurate, and that was Shorten's personal unpopularity.

Many in Labor will be asking the "what if" question that if they had a more popular leader - namely Anthony Albanese - as the front man would they find themselves in power?
Meanwhile over in the UK, no surprise that the Brexit Party is expected to win big in the European elections.

Metro UK: Brexit Party favourite to win votes in European elections, says poll
Nigel Farage’s party has doubled its support in the last fortnight – now in first place – and is now on track to get 34 per cent of the votes in this month’s elections. The latest Opinium poll shows Labour come in second place with 21 per cent of votes, falling seven points in the last two weeks, while the Tories lag behind in fourth place with 11 per cent. The Lib Dems are in third position with 12 per cent, having risen five points.
This is no surprise as UKIP pulled off surprise wins in European and local elections previously. What is surprising is the Brexit Party's polling for the next British national election (Westminster voting intentions).

BMG Research: BMG’s European Parliament and Westminster Voting Intention Results: May 2019
The poll shows that the Labour Party are in the lead for the first time since 2018, with a vote share of 30%. This a drop of 4% from April, and has then 3 percentage points above the Conservatives. The Conservative party have a predicted vote share of 27%, recording a reduction of 7% from last month.

Following on from a positive performance in the local elections, the Liberal Democrats predicted vote share is up 7 percentage points from last month on 18%. The Brexit Party enter BMG’s Westminster tracker with a vote share of 10%. Change UK and UKIP find themselves with just 3% of the vote share each.
Brexit Party polled at 6 percent in the April poll.

Britain Elects: How are the polls looking?
I suspect Brexit Party support is closer to 10 percent than 20 percent. Upstart and outsider parties have often under performed their polling, and there's no reason to think Brexit Party won't also follow that pattern, until it doesn't. Additionally, if the UK ever gets around to leaving the EU, support for the Brexit Party could vanish if it doesn't disband itself, as seems likely. Still, in the near term, a big Brexit Party win in European elections will give their leadership a platform and a loud voice in ongoing Brexit negotiations and debates.The potential for a surge into competition with Labor and Tories is not out of the question. If you remember your recent history and not the media narrative, UKIP started on the issue of an EU membership referendum and shifted to immigration after talking with voters. If the Brexit Party takes an entrepreneurial approach to the next national election, it might find one or two other ignored topics that will attract enough support to push it into the next government or make it the main opposition to another Tory-Labour coalition.

Chinese Hoarding Dollars Again

21st Century: 境内外人民币汇率双双创年内新低 跨境汇差套利交易再度活跃
Sogou: Both domestic and overseas RMB exchange rates hit a new low in the year, and cross-border arbitrage trading resumed
While the Sino-US trade friction has not yet been eliminated, the sudden rise of the US dollar has once again put new downward pressure on the RMB exchange rate.
In my opinion, there is very little evidence of trade friction in the markets right now. Maybe I'm wrong and the S&P 500 should be near 3200, with talk of Dow 30,000 picking up, and current prices are the result of trade friction. My sense is many people still believe a deal is coming, they believe Trump will not risk economic pain or stock market declines. On the other side of the ledger, I continue to expect this cycle will end with currency devaluation across the world, including or set off by the Chinese yuan, ending with DXY at a two- or three-decade high. Going back to the Logic of Strategy post, I expected an economic crisis in China would trigger trade friction, not vice versa.
In his view, this does not mean that the RMB exchange rate will quickly approach the "7" integer mark. The reason for this is that unlike last September's escalation of Sino-US trade friction, when the offshore one-year RMB exchange rate was expected to fall by more than 1,000 basis points, the current offshore one-year RMB exchange rate is expected to fall by only 500 basis points, which indicates that most overseas investment institutions believe that the pressure of the Central Bank of China to intervene in the foreign exchange market will make it difficult for the RMB exchange rate to effectively fall below the "7" integer mark in the future.

"This is very helpful to solve the problem of clearing the foreign exchange market. As long as the RMB can hold the 7-integer mark, the arbitrage of hoarding USD by many enterprises will gradually ebb, indirectly supporting the momentum of stabilizing the RMB exchange rate. " A head of the financial market department of a joint-stock bank admitted frankly to the reporter.

..."More importantly, good economic data in the United States has led hedge funds to sharply lower the Fed's expectation of cutting interest rates this year, thus strengthening the US dollar short covering." A U.S. hedge fund manager told reporters, "hedge fund's move is definitely not good for stabilizing the RMB exchange rate-the RMB exchange rate both at home and abroad showed a rapid decline on the 17th due to the impact of the jump in the U.S. dollar index."
This type of thinking is exactly why I worry about USDCNH going through 7.00. Many believe it won't despite understanding that the U.S. Dollar is driving the market. You can be near certain a break of 7 will not happen if you are certain the U.S. Dollar has no more than 2 percent upside left. Otherwise, uncertainty is high.

Additionally, it's important to keep in mind how CNY and CNH work with each other. In simple terms, the PBoC can set CNY where it wants and force the domestic market to buy and sell at this price. There are limits of course, they can't go too far above or below without risking major distortions or black markets, but if there was no CNH they would have far more power to set the exchange rate.

CNH introduces a new variable. When CNH is above CNY (the offshore yuan is stronger than onshore), it indicates capital flowing into China and into the yuan. If you're in Mainland China, you bring your foreign currency into China because you can buy yuan cheaper than in Hong Kong. Arbitrageurs will bring FX into China, buy CNY, and sell CNH in Hong Kong.

When CNH falls below CNY, it creates a bigger headache for the PBoC. First there is the reverse arbitrage, buy USD with CNY in China, then buy CNH in Hong Kong. Instead of having unlimited CNY to stop appreciation, there is limited reseves with which to defend the currency. Additionally, exporters can divert their capital from Mainland China. Instead of bringing capital home, they exchange it for CNH overseas or they leave foreign exchange in foreign banks hoping for even better prices in the future. Since capital controls are tight on the Mainland, falling CNH and rising depreciation expectations will divert capital away from China. Capital controls can also be avoided with cryptocurrency or through more expensive methods such as real and fake exports.
At present, foreign trade enterprises and overseas investment institutions are mainly involved in domestic foreign exchange arbitrage. They mainly use the name of cross-border trade settlement to purchase foreign exchange according to the domestic exchange rate to pay cross-border trade payments to affiliated enterprises, which will then take the US dollar position to the overseas offshore market for foreign exchange settlement for more RMB. After deducting relevant transaction costs, the risk-free foreign exchange earnings generated by the cross-border foreign exchange arbitrage exchange since last week exceed 1 percentage point.

At the same time, the cross-border arbitrage of foreign exchange difference has led to a sudden increase in domestic demand for foreign exchange, which has virtually put more downward pressure on the RMB exchange rate in the onshore market.

At present, he is most worried about the reactivation of cross-border arbitrage, which will lead to the offshore exchange rate "dominating" the current RMB exchange rate trend. If overseas speculative capital seizes this opportunity to "artificially" expand the range of domestic foreign exchange differentials by significantly depressing the offshore RMB exchange rate and stimulate the continuous fermentation of domestic foreign exchange differential arbitrage transactions, it may drag the RMB exchange rate close to the "7" integer mark in the short term.

"To reverse this situation, the relevant departments should not only take targeted intervention measures to reduce the foreign exchange gap in China at the necessary moment, but also choose the right time to intimidate speculative capital and prevent speculative short selling from continuing to ferment." This Hong Kong bank foreign exchange trader believes that.
The PBoC will wait for the right moment to burn the shorts, to get the biggest bang for their bucks.
Enterprises hoard U.S. dollars
With the RMB exchange rate falling below the 6.9 integer mark, more and more companies are hoarding USD positions for arbitrage.

The chief financial officer of a large domestic foreign trade enterprise disclosed to reporters that compared with the same period last year, the enterprise has retained more than 6 million US dollars in position, because the head of the enterprise thinks that the Sino-US trade friction may cause the RMB exchange rate to break "7" in the short term, and then the enterprise can exchange foreign exchange and exchange more RMB.

"Since this week, quite a few foreign trade enterprises have taken similar actions." The head of the financial market department of the above-mentioned joint-stock bank pointed out to the reporter. The reason why foreign trade enterprises hoard dollar positions is not necessarily to bet on the decline of the RMB exchange rate to take more RMB, but also to consider "preparing for a rainy day" for future foreign payment of USD-if the RMB exchange rate continues to fall, these enterprises have to reserve dollar positions in advance to reduce exchange risks, and also have to take into account the tightening of cross-border capital flow supervision measures, resulting in enterprises unable to pay USD on time.

In his view, this has led to a resurgence of the problem of clearing the foreign exchange market. In particular, when the demand for foreign exchange settlement in the market continues to fall below the demand for foreign exchange purchase due to the recent hoarding of US dollars by enterprises, the RMB exchange rate has again shown an inertial downward trend due to its inability to digest the "foreign exchange purchase order".

Andy Wester revealed that as long as the RMB exchange rate fell below the 6.9 integer mark in the past three years, the problem of clearing the foreign exchange market would follow one after another, causing the RMB exchange rate to drop rapidly to around 6.97-6.98 in the short term. This time, some speculative capital did not rule out taking this as a warning and took the short selling method of betting on the rapid decline of RMB to "draw chestnut from fire".

"The most effective way to solve the current problem of clearing the foreign exchange market is for the Central Bank of China to directly intervene in the foreign exchange market, breaking the expectation that enterprises and speculative capital are betting on the RMB to break 7. As a result, if companies fail to hoard U.S. dollars for arbitrage, they will turn to quickly settle and stop losses when the RMB exchange rate rebounds, and the relationship between supply and demand in the foreign exchange market will also tend to be balanced and stable, thus laying a firmer foundation for the stabilization of the RMB exchange rate. " The head of the financial market department of the above-mentioned joint-stock bank believes that.
The PBoC has two problems in defending the yuan. One is that it cannot control EURUSD, USDJPY, USDAUD, etc. Thanks to dedollarization efforts, a dollar bull market can chip away at those reserves indirectly. Second, USDCNY 7.00 has become a thing and it is less than 1 percent away. If the dollar is rising and speculators want to press their bets, the PBoC will have to spend.

Maybe concerns are overblown again. Maybe the U.S. dollar is peaking or has peaked. Maybe a trade deal is coming. If not, could be a lot of surprised people saying: