Trump adviser Kudlow calms the markets. Is now the time to buy the dip in stocks?

President Trump’s key economic adviser Larry Kudlow (pictured) jumped into action to try and soothe volatile stock markets yesterday, which were flagging at the open due to China’s announcement of retaliatory tariffs on over 100 American goods. Speaking to Fox Business, Kudlow said Trump’s tariff plans were just “the first proposals”. He added: “In the United States at least, we’re putting it out for comment, it’s going to take a couple months. I doubt if there will be any concrete action for several months.”

The statement seemed to indicate the US is flexible in its approach, and may soften tariffs. Perhaps all of this could just be Trump’s ‘art of the deal’ in action – talking tough to make China come to the negotiating table. Regardless, stocks moved up at the close after the big early selloff yesterday. The S&P500 closed up 1.15% higher. Investors took Kudlow’s words as a good thing.

Is it time to buy the dip in stocks?

It could very well be. Fear over the trading situation between America and China was a significant part of the reason why stock prices (particularly in key US indices) fell over the past month. However, now that reports seem to indicate the two nations are trying to find a way to resolve the dispute behind the scenes in private talks, it seems there is a chance that fears of a full-scale trade war may not come to fruition. Any confirmation of a cessation of hostilities over trade may prompt a surge upward for stocks, not to mention the fact that the start of the earnings season is just around the corner – another potential boon for stock market indexes.

Buying the dip in stocks ahead of the upcoming earnings season could bode well for investors, historical data from Jefferies shows. Analysts at the bank said in a note last week that the S&P500 averaged a gain of nearly 2 percent during an earnings season since 2000 when the period follows a monthly decline.  Keep this in mind as the U.S. earnings season kicks off on April 13 with J.P. Morgan Chase, Wells Fargo and Citigroup releasing quarterly results!

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It was a tough first quarter for equities. Here’s some reasons why…

It has generally been a rough first quarter for global stock markets. The rip-roaring gains that made 2017 so lucrative for investors came to a screeching halt in the first 3 months of this year.

The Nasdaq index, which boasts the biggest names in American tech among its constituents (including Apple, Amazon, Facebook and Nvidia among others), went into the red (a loss) for the year after a 3.5% fall during trading this week. The weakness came as investors worried about the future profitability of these companies, in light of a spate of bad press for them recently.

For example, Facebook shares were pulled down by over -12% for the month due to concerns about user privacy following the Cambridge Analytica scandal, while Amazon stock has been under pressure after coming under fire from Trump as well the European Union, which has had the Bezos behemoth in its sight for some time. Last month, the European Commission revealed plans to clamp down on the market dominance of the business of Google amongst other tech titans including Amazon by aiming to tax consumers differently.

Nvidia shares took a large hit too this month (down over -5%) after the firm said it would be halting tests for its autonomous vehicles in light of an incident in which a self-driving Uber hit and killed a pedestrian in Arizona.

The broader picture for stock markets

Despite individual company woes, the broader macro picture is also worrying the markets. It seems reasonable to point out that a lot of selling may be taking place off the back of worries about the future of the US/China trading relationship. In response to President Trump’s tariffs on steel and aluminium enacted last month, China unveiled retaliatory duties worth $3 billion on US food imports, which was quickly followed by tariffs for over 100 goods on April 4th, including cars, certain aircraft, tobacco products, whisky and many others.

Investors will be watching closely for any further escalation in rhetoric and action. Given that both economies provide so much to the engine of global economic growth, the outcome of the trade dispute will be seen as very important for investors trying to predict the future for world stock markets.

The world economy is stronger but tensions are rising – a look at the OECD’s latest report

The OECD says the global economy will see its strongest growth in seven years in 2018 thanks to a rebound in trade and investment, though it also warned today that a trade war could threaten the recovery.

In its March 2018 interim economic outlook which used the subtitle ‘Getting stronger, but tensions are rising’, the organisation updated its outlook for G20 economies and raised its global growth forecast for 2018 and 2019 to 3.9 percent – the highest since 2011, from previous forecasts of 3.6 percent for both years.

The raised forecast is partly due to expectations that U.S. tax cuts will boost the American economy.

Here were the key positive takeaways from the report:

– Growth is improving or steady in most G20 economies

– Trade and private investment are bouncing back

– New fiscal stimulus in the United States and Germany will further boost short-term growth

– Inflation (a concern for Central Banks) is set to rise slowly

– Consumer confidence, particularly in BRIICS nations (Brazil, Russia, India, Indonesia, China and South Africa) has risen sharply

The key negatives and risks were as follows:

– Income gains, particularly for median and low income households have barely improved over the last decade

– Public and private debt in G20 nations is very high, with China leading the way at over 200 percent of GDP

– The pace of structural reform is slow, in emerging market countries especially

– An escalation of trade tensions would be damaging for growth and jobs

Regardless, the overall picture is healthier. Acting OECD Chief Economist Alvaro Pereira said: “We think that the stronger economy is here to stay for the next couple years,” He added, “We are getting back to more normal circumstances than what we’ve seen in the last 10 years.”

This is good news for investors the world over, as a more robust global economy will create a better environment in which companies can grow and expand more easily, boosting corporate results and shareholder returns.

UBS say Worries on China’s Debt are Overblown as it Sets Up Exclusive Investment Fund

Swiss banking giant UBS is introducing a new private fund for institutional and high net-worth individuals with an interest in investing in China’s booming equity markets.

Having obtained a new permit granting them increased access to stock markets in the country, UBS is introducing the first mainland China stock fund owned by a company outside China. The UBS China Equity Private Fund Series 1 has completed it’s initial offering, and will help its members to invest in China’s thriving stock markets, which for many years were available only to Chinese citizens.

China’s markets are dominated by state-owned businesses, but private companies are starting to make headway too, particularly in sectors like healthcare. Not only this, but the central government has made reforms in order to let foreign investors trade on more-restricted stock exchanges like the Shenzhen and Shanghai exchanges (which contain so called ‘A-Shares’ – the stocks that this new fund from UBS is mostly interested in).

Historically, these shares were only available for purchase by mainland citizens, due to China’s skepticism about foreign investment, but the country is continuing to open up its markets to overseas wealth.

UBS has a long history in China. UBS AG was China’s first qualified foreign institutional investor, as approved by the China Securities Regulatory Commission in 2003 – a massive deal for a foreign bank!

The fund’s manager, Zizhen Wang, said “From a long-term perspective, UBS sees sustainable growth in the Chinese economy and opportunities in the A-share market,” he added, “Blue-chip stocks are fairly valued and leading companies across numerous sectors are enhancing their international competitiveness.”

In another vote of confidence for the economy, UBS also said they were less worried about China’s debt burden than other banks. Speaking to Bloomberg, Jason Bedford, a Hong Kong-based UBS analyst, said a financial systemic credit event in China is “very unlikely”. He added that a lot of the items on China’s balance sheet were less risky than many thought, even the asset-backed securities.

He said “A significant portion of off-balance sheet exposures are composed of benign, no-risk or low-risk items.” He added, “The failure to distinguish the risk between these items has often led to an exaggerated risk perception among many market watchers.”

It’s no secret that the Chinese economy is hooked on debt, especially in its state-owned enterprises. Lending in the country has grown rapidly over recent years, as household and corporate wealth has ballooned. China’s citizens and businesses have been looking for higher returns in a system where bank interest rates have been held down.

The government is aware of this, and looks to be taking steps to deleverage the economy by cracking down on certain problem-areas, including the booming online lending market.

Just this week, CNBC reported that a top-level Chinese government body issued an urgent notice on Tuesday to provincial (local) governments, urging them to suspend approval for the setting up of new internet micro-lenders. They also apparently told local regulators to restrict granting new approvals for micro-loan firms to conduct lending across regions.

These kinds of businesses have grown massively in popularity over recent years, by giving credit to people who couldn’t get loans at state banks, which tend to favour bigger corporate clients instead.

Xi Jinping has made clear that he backs the idea of deleveraging so as to ‘cleanse risk’ from China’s financial system, and the governments actions so far have been applauded by analysts. But though reforms are clearly in motion, whether this will be enough to offset China’s already hugely leveraged economy is less certain.

As we saw in the case of the financial crisis in 2008 where top Wall Street firms were leveraged (indebted) to an obscene degree, a high amount of total debt can signal systemic financial fragility. When everyone owes everyone else money, a negative shock to the economy, or even just a spontaneous panic can upset the system, by causing a lot of borrowers to default at the same time. When financial firms are highly leveraged, it also makes it easier to have a bank run or a similar liquidity crisis. During the financial crisis, this was certainly the case. China must avoid this kind of situation at all costs.

Though UBS are bullish, other data shows the future looks bleak for the world’s second largest economy. Bloomberg economists Fielding Chen and Tom Orlik estimate that China’s total debt will reach 327% of GDP by 2022, a staggering level which could make it harder for the country to avoid a financial crisis, especially considering actual economic expansion is set to slow to 5.8% in 2022 from 6.7% in 2016, compounding matters further, and as growth continues to slow while debt continues to rise, the risk of a collapse in asset prices looms. This would spell big trouble for an economy that the world depends on for so much.

Patrick Jones

The institutionalisation of Bitcoin

In December 2017, one of the world’s largest derivatives exchanges will officially launch a Bitcoin futures product. At that point, the cryptocurrency market will have changed forever.

Hindsight is a wonderful thing. Just 5 years ago, a single Bitcoin traded below $15 against the US Dollar. As of November 2017, the price peaked above $7500. Many investors who parted with a little of their spare change back in 2012 to invest in the cryptocurrency are now millionaires, but its beginnings were far more humble, and its future was anything but certain.

In 2012, the cryptocurrency existed in relative obscurity, usually known only by those engaging in shady activities such as the purchasing of items on the dark web, where users could find anything from illicit drugs, weapons, medical equipment, passports and ATM hacking guides to hitmen for hire.

The most well known of these sites was the Silk Road, one of the largest online black markets, which users could only access through Tor, an anonymous network originally developed by the United States Navy to protect US intelligence communications online.

ToR
Tor logo containing the onion, which represents how messages are encapsulated in layers of encryption using onion routing technology

For those who ‘travelled’ on the Silk Road, Tor was the first layer of protection from the authorities, but there was yet another for safekeeping — Bitcoin. The mysterious cryptocurrency allowed buyers and sellers alike to conduct transactions directly without using a third-party platform like PayPal, or moving funds from one bank account to another. Through the use of blockchain technology, people could have relative anonymity whilst making dubious purchases. The combined use of these technologies prevented them from leaving a digital footprint which could have been used to prosecute them.

When Silk Road went mainstream after being featured in a Gawker article in June 2011, it quickly caught the interest not only of the public at large, but authorities the world over. It took over 2 years since the piece was published before the Federal Bureau of Investigation stepped in and moved to close the marketplace. In 2013, the sites owner Ross William Ulbricht was arrested by the FBI. Data taken from 2012 showed that business had been booming — with an estimated $15 million worth of transactions being made on an annual basis on Silk Road, all entirely in Bitcoin.

New iterations of the site existed since it was first shut down, but they never had the same traction the original did, but for Bitcoin, the journey was just beginning.

Silkeh
The original logo for the Silk Road marketplace. The name derives from a series of trade routes that connected ancient civilisations across Asia.

Before legal action for the Silk Road came, other sites watched closely by regulators (such as the infamous WikiLeaks website) began accepting Bitcoins as a form of donation. By 2012, WordPress was on board and accepting the cryptocurrency, and it started to look as if Bitcoin was moving into the mainstream.

In the years between its original emergence in 2009 and its huge surges in price throughout 2017 until now, there have been far too many fundamentally important events which have taken place throughout Bitcoin’s historical timeline to be able to discuss in detail here. Sufficed to say however that there has been periods in which the future of Bitcoin as well as other cryptocurrencies like Ethereum and Litecoin have seemed in jeapordy, as regulators who were usually trying to control conventional banks struggled to get a grip of a currency which operates beyond official financial systems and monetary authorities.

Indeed, there have been numerous crackdowns on Bitcoin trading, not least in China this year. In mid-September, Beijing moved to stamp out cryptocurrency exchange trading as well as ICO’s (independent coin offerings), sending the price dipping and diving. By November 2017, the last digital currency exchange in China was officially shut, but this has not stopped the move upwards in Bitcoin’s value.

Regardless of state intervention across the globe, there may yet be hope for crypto fans everywhere. On November the 13th 2017, Terry Duffy, head of the worlds largest options and futures exchange (CME Group), told CNBC that the firm would be listing a Bitcoin futures product as early as next month.

CME Group is the world’s leading and most diverse derivatives exchange marketplace, offering the widest range of global benchmark products across all of the major asset classes, including futures and options based on interest rates, equity indices, foreign exchange, energy and metals.

The move to accomodate digital currencies is symbolic, as it ultimately represents just how far the cryptocurrency has come since its days of relative obscurity.

Noted names in the banking world such as JP Morgan’s Jamie Dimon have trash-talked Bitcoin in the past, calling it a ‘fraud’ and denouncing those who trade it, but others, including Wall Street titan Goldman Sachs have seemed more open to the idea of cryptocurrencies in general. In a recent discussion with CNBC, Goldman CEO Lloyd Blankfein said he would not prevent the firm from establishing an institutional Bitcoin trading desk, according to reports.

Now that an established financial institution like the CME Group has given the official green light for BTC trading, listing it on the exchange, this adds a new level of legitimisation to Bitcoin, and could prompt more and more financial institutions to adopt official BTC trading in future.

This could have the affect of driving up prices further, or indeed the opposite. By pushing digital currencies more into the remit of major financial institutions, are they at risk of becoming more and more regulated? If so, this may undermine the entire premise of cryptocurrencies, which are supposed to provide anonymity for their holders, spenders and buyers.

Regardless of whatever happens next, up until this point the price has been on a tear:

Btc Chart

Bitcoin has survived throughout numerous challenges, but can it withstand the scrutiny of the mainstream?

Patrick Jones