Smart Defense
Chinese Minister of Finance Liu Kun has made his first official statement since his inauguration in March. At the annual meeting of the New Development Bank, Liu used the term “trade friction” to describe the trade conflict between the United States and China in an effort to mitigate market stress. Leaving no doubts in anyone’s mind about China’s unwillingness to surrender, the Chinese have already put together a 150 billion dollar package to mitigate the effects of increased US import taxes. This fund, to be made available at the end of this quarter, will be primarily used to protect the labor market and invest in infrastructure development. Liu emphasized that the Chinese “smart defense” will only be directed against US attacks, while the Chinese economy will be opening up more to the rest of the world: “China doesn’t wish to engage in a trade war, but we will resolutely respond to the unreasonable measures taken by the United States.” At the same time, the China Banking and Insurance Regulatory Commission (CBIRC), the main financial regulator, has issued a notice to allow foreign ownership in financial institutes and granting equal right to Chinese and foreign investors, completing the reform process that started last year.
Over-Politicized
The unsuccessful China-USA talks in Washington and the complications around President Trump have put pressure on the American indices. Alibaba’s earnings report, which didn’t live up to the expectations, became a strong sell signal on all Chinese corporations, with Alibaba itself decreasing by 3%. It is no wonder that all US indices finished the day in the negative. Asia opened with new hopes for the day, as Scott Morrison was nominated Prime Minister until the government crisis is resolved. The temporary prime minister has calmed investors on the continent, but the Australian index only closed the day about 0.05% higher than the day before. The only negative performance in Asia was the Heng Seng, at -0.5%. The oil market has recovered slightly, with WTI trading at $68.40 and Brent at $75.30.
USDJPY
After Q1’s inflation rate of over 1%, prices increased slower in April, hitting its lowest point mid-month at 0.6%. July’s inflation was once again around 1% (0.9%) and the markets reacted well. Interestingly, it was the food and transportation prices that led the upward pull, while oil stopped the hike in July. The commodities market likewise did not show an upward trend. Nonetheless, even 0.9% is far from the Bank of Japan’s target of 1.5-2% which suggests to most analysts that neither interest rate hikes, nor the quantitative easing are about to end in the near future.
The Yen however showed signs of weakness against the USD, something that the Japanese central bank loves to see. While USDJPY’s volatility was far below that of other pairs, the 3-day rally from 109.78 to 111.48 was still an impressive move. The chart suggests that the peak has been reached, as only in the beginning of August could the currency stay in this region - and then only briefly. 111.50 is a strong resistance and considering that the MACD lines crossed to signal sell orders, the price will probably remain range-bound for the next few days.
Corn
Since the end of May, corn has been following the larger downtrend of the commodities market. Price went from $4.10 to $3.37 in three distinct steps. Favorable weather conditions and insecure demand joined forces against long positions. Fortunately, such an important commodity can not fall forever and below $3.5 new buyers appeared to support the price. The chart shows a similar thing happen in 2017 as well: a peak at $4.10, a fall to $3.5 and then on to sideways moves.
One might even say that it is just the usual seasonal nature of the commodity. This is supported by the buyer base developing in the blue square. Compared to last year however, we are seeing bigger moves, probably as a result of the current insecurity in global trade. This trade insecurity did not exist last year, so after a fall, quiet sideways moves happened, as opposed to this year’s peaks and valleys. $3.4 buys with stops under the support bring a lot of buyers into play, which if the price does go below $3.4, the newly energizes sellers might push the price to new depths.
Sincerely,
Laszlo | Market Analyst
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