As the festivities of Father’s Day wrap up here in the U.S. like many celebrations, this too may conclude with a display of fireworks. The issue at hand is this: If there are – they’ll be on the other-side of the globe. However, their initial reverberations may become visible through the power of live (aka appointment) television.
For those that may not have ever watched these shows or programing, the most accessible network coverage will be broadcast via Bloomberg™ and CNBC™ via their Asia desks. i.e., anyone with cable access should be able to locate it on their service. So, for those looking for clues, yet only follow “markets” in some form of perfunctory manner – this is one live session of television you may need to watch.
In my opinion, this Sunday, in-particular, is a must-see-event. For this is where we’ll get the first glimpses as to exactly what may, or may not be coming our way via the “markets.” And yes, again, I feel it’s that important, no hyperbole intended.
The reason why I state the above is that China and the U.S. have formally announced and outlined their agreement to disagree and impose tariffs on one another. The opening salvos? $50 Billion respectively. If we stick with the soap opera theme, this is the equivalent of the two main stars suddenly realizing that the whole affair has been a sham, and it’s now who can hire the best lawyers – and screw the other out of more than half.
Sure, it makes great television. But when its real life? It’s far messier, full of even more innuendo, real and idle threats, along with being fought full of unforeseen backfiring consequences. The difference in those consequences is also paramount, for more often than not they’ll effect those viewing far more than those in the starring roles.
Up until now the bickering back and forth between other nations in respect to earlier negotiated deals has truly taken on the appearance of a soap-opera in progress. NAFTA, along with E.U. agreements/disagreements being bandied about at the latest G-7 (or G-6+1 which makes my point about the whole soap-opera drama analogy even more fitting, but I digress)) has been like watching this season’s drama build up of the supporting cast, waiting for when the two “stars” are finally going to engage.
On Friday – you had just that.
Whether one agrees or not, is no longer the issue. What now has to take precedent is what happens next – and be prepared as best one can for either an insulating stance for one’s business well-being, or a profiting one. There might even be a way for both, but that will only be for those watching, paying attention, and being nimble and decisive in their execution. Everything may/will be in flux. Repeat: everything.
However, just like fictional dramas, there is always more to the characters back-story that needs to be assessed when trying to figure out where the next move may come from, because just when you think the “obvious thing” should happen next? The writers throw in a twist that leaves everyone second-guessing. The writers of these trade tariffs are no different. As I’ve stated before: Tariffs are designed to be highly punitive. They’re not to “make nice” as some may think. They also fall into the Mike Tyson realm of reality. e.g., “Everyone’s got a plan – till they get punched in the face.”
Tariffs are precisely that when it comes to the “sport” of trade. But make no mistake: Trade – is a take no prisoners blood sport with real losers and winners, where economic survival is the prize. Sometimes – there is no second place finisher. Think about it.
On Sunday evening around 9:00pm ET the Asian markets will be fully engaged once China’s markets open and the tape begins to roll. The evolving plot course that needs to be paid attention too are 1) The Shanghai Composite Index (SCI). And 2) The Hang Seng. The reasoning is simple.
Both of these indexes have been moving from a technical perspective into dangerous territory. As I’ve stated before the Shanghai is holding above (barely) the 3000 level. If this level gets breached, and with any real follow-through, it could trigger a wider sell off.
The other reason is, just like the SCI, the Hang Seng is now in a very similar position, only here it is 30,000 respectively. Should both the SCI along with the Hang Seng break downward in unison with any substantial follow through, it’s going to make for a very interesting start in the U.S. on Monday to say the least.
What many don’t quite get (and I say this directly to most of the Ph.D’d economic professorial cabal and show hosts that paraded this set out to lecture us plebs how genius the Fed. has been, and how “smart” they are in
naval-gazing analyzing the moves, but I digress again) is China may be in a far more inferior negotiating position than the U.S. i.e., If the “markets” fall apart directly after China announces – the blame becomes China’s.
You may agree or disagree, but that’s how it’ll be played by the administration should the Chinese markets begin to falter overnight sending even a hint of contagion fears across the ponds. But the capital markets are not China’s only problem in the overnight session. There’s another. e.g., The Hong Kong Dollar (HKD).
The HKD is the currency to watch when it comes to China’s property bubble and its increasing use for even further speculation.
This currency of late has been falling below key metrics (e.g., its lower boundary) of its peg to the U.S. $Dollar and has been doing so for much longer than what is seen as “normal.” The issue here is that this peg is heavily influenced via the Federal Reserve’s interest rate policy. And with the Fed. raising again this week, along with changing key verbage (insinuating far more of a hawkish posture) and now making every meeting a possible “live” event meaning a hike possible at every further scheduled meeting (i.e., more than expected) with the advent of adding a press conference after every one going forward may exacerbate this situation to a point of having the Chinese politburo having its own “Sorcerer’s Apprentice moment” as soon as Sunday night (Monday morning Asia time).
Here’s what Austrian economist (one of the very few I hold in high regard) and China watcher Andy Xie recently wrote about this possible impending dilemma. To wit:
“The Hong Kong Monetary Authority has been buying up Hong Kong dollars to stop it from falling below the lower boundary of its pegged range to the US dollar. But why has it been allowed to fall to the lower boundary and stay there so long? That’s not how a peg is supposed to work. It should try to hug the US dollar interest rate as close as possible.
By deviating from the US interest rate by so much and for so long, Hong Kong is setting itself up for an interest rate shock.”
And now here we are with fully engaging tariffs, interest rake hikes, and a week ending Quad-Witching on Friday’s close that masked any interpretations of the Fed’s new policy directives along with tariff announcements. The mainstream business/financial media’s so-called “smart crowd” tried to profess that the calmness was all due to the Fed’s “genius.” I vehemently beg to differ.
Hint: It was all due to the HFT algos’ stop hunting and price pegging antics for quad witching.
The real show begins tonight for any real clues, so as they like to say in TV land…
“Please, stay tuned!”
© 2018 Mark St.Cyr