As the second quarter begins, the financial markets seem fixated on China/U.S. trade frictions, or lack thereof. This narrative is old and stale. For those new to the realm of international relations, be aware that China will slow-walk these negotiations. There will be many attempts to “agree to disagree.” For example, in Monday morning’s SOUTH CHINA MORNING POST, there was an article titled, “China Refuses to Give Up ‘Developing Country’ Status At WTO Despite US Demands,” about China’s “privileged position” at the World Trade Organization. In the simplest terms, the WTO allows for countries to self-define as developing country status. This brings certain rights that allow for longer transition periods before they have to be in full compliance with WTO rules and regulations. This is described as “Special and Differential Treatment.”
This issue has been an area of contention for several years as Robert Lighthizer has been complaining since China entered the WTO. At a Ministerial Conference of the WTO in Argentina in December 2017 Lighthizer said in a speech, “We cannot sustain a situation in which new rules only apply to the few, and that others will be given a pass in the name of self-proclaimed development status.” Don’t underestimate Lighthizer’s criticisms for he is the premier negotiator in the world on trade issues. While Larry Kudlow continues his saccharine approach to the negotiations in an effort to placate Wall Street, the view from NOTES FROM UNDERGROUND is that Lighthizer cannot be pleased with today’s article in the South China Morning Post. Look for the U.S. negotiating team to push for greater Chinese compliance on intellectual property issues, as well as demands on China to keep the YUAN stable to strong.
The Chinese will keep trying to slow-walk the demands of the U.S. trade reps for President Trump is facing election while Xi is facing no political challenges (as of now). If you follow the trajectory of Lighthizer’s career over the last 20 years you will realize the significance of his concern over China’s developing market status. There is a great deal of spin everyday concerning the negotiations, but if this SCMP piece has stature then it will not be a smooth road for the US, regardless of the stock market exuberance.
***Two major stories: It was reported that the Russian central bank bought 274 tons of gold in 2018. A Bloomberg story noted that gold now represents 19 percent of Russian foreign-exchange reserves, the highest since 2000, while DOLLAR reserves have dropped to 22 percent from 46 percent since mid-2017. Also, Bloomberg ran a story on Monday titled, “China Is on a Big Gold-Buying Spree.” It said China has been buying gold on a monthly basis, having added 43 tons since December, the second largest state buyer after Russia.
A trader asked why prices aren’t much higher with all this central bank buying: It’s a good question and enough to keep one cautious. But it also explains the violent corrections in the market as it takes little to force a market correction when the large buyers move to the sidelines. The other issue is that there have to be some massive GOLD SHORTS that are getting nervous especially now PLATINUM has had a significant rally off its historic lows versus gold.
Now that the FED is pivoting away from QT and raising short-term rates, pay close attention to your technical levels to recognize when GOLD is ready to break-out of its recent range versus the dollar and all currencies. Then, add in the recent threats from Saudi Arabia about not taking as many dollars for oil in a political response to Congressional legislative threats. The continued use of ECONOMIC sanctions as a favorite tool of U.S. foreign policy is causing a shift away from dollars and a possible alternative to the SWIFT system. Also, the coming election uncertainty in Europe coupled with an ECB searching for a policy to stimulate the European economies is generating some investor unease, regardless of what global equity markets are indicating.
There will be more to discuss about Europe this week as we try to look through the narrative portrayed by the financial media. Brexit is far from the central problem facing the EU. There are concerns about a slowing economy, plus Chinese trade issues that’s creating a problematic situation for Brussels. Where have Wilbur Ross and Peter Navarro gone?
April 8, 2019 at 5:39 pm |
I don’t think there will be an enforceable trade deal with China, if any deal at all.
At best they will agree to buy beans, Boeings, and backhoes, and will promise to stop appropriating IP and cut the trade balance ……..but they won’t really do much to comply.
The most valuable asset in the world is the USA consumer market…..we gave it to them. Why would they give it back?
April 8, 2019 at 7:06 pm |
I would also add tax revenue from US citizens, living in the USA and abroad, as one of the most valuable assets in the world. It’s a fail safe business model, tax your citizens for life and print the reserve currency of the world. I would even venture to say that all the gold being stored in private vaults and homes across America is by default a backing to the USD, because when all the gold is sold one day, it will probably be for USD. Who needs Fort Knox when you have the Patriot Act?
April 8, 2019 at 11:02 pm |
“Where have Wilbur Ross and Peter Navarro gone?” Trump put them back into the refrigerator, or deactivated them. Or better yet, Will Trump fire them?
April 9, 2019 at 6:03 am |
As far as technical levels, nothing has changed since last month’s post. Buyers need to regain & hold a bid above 1325 for an attempt to retest/break Feb. ~1350 high. IF that high gets taken, it opens the sky to a potential test of 1370 area. Anything short of this (no pun intended), /GC at best will remain range bound, at worst head South again.
My .02
April 9, 2019 at 7:25 am |
Good analysis……i think you need a stock market break to get Gold really going. if the market breaks, credit spreads will go out, and people will get concerned about the debt bubble.
Other than some minor concerns on Brexit, investor interest in Gold is near Zero.
April 9, 2019 at 7:30 am |
Yes, it’s all fluff. If the administration/congress really were serious about trade imbalance there would be reduction of offshoring subsidies.
April 9, 2019 at 9:49 am |
There will never be a real substantive US/China trade deal. Why? Because behind it all is China’s unrelenting quest to challenge the US as the other global superpower and eventually replace it. South China Sea Islands with military installations, threats to Taiwan, Spratly Islands dispute, then moving on to Africa investments, sending military aid to Venezuela, etc. The Battle of the Titans means that any trade announcement will be fluff as Chicken says, because a breakdown in talks would have a major impact on markets. Ross and Navarro are there just to hold Lighthizer’s pistols in this ongoing duel. Lighthizer is the tough guy that Trump needs as his man in this Fight Club.
As to gold, I’ve maintained that the Central Bankers have kept a tight lid on the paper gold market for two reasons. One, for some it allows them to buy physical at depressed prices, and two, a free and soaring gold price is incompatible with QE. Hope that doesn’t need explanation.
QE will reappear at the next market break.
Gold will break out when Russia and China who have been accumulating the metal (and silver) and understating their total holdings, are ready to make their currencies convertible into it. The BIS that has been managing this operation is beginning to see the light and is coming to reality. SDR or something besides the dollar will happen. Bretton Woods is Dorian Gray at its conclusion.
Patience is required. Technical levels are not helpful where markets have interventions. That has been obvious in the fixed income arena and will become so in precious metals and equities.
April 10, 2019 at 10:51 pm |
Asherz—a wonderful post indeed and the idea of China and russia being in accumulation mode absolutely is the KEY POINT—why allow the momentum players a free ride while you are accumulating–this is the best market manipulation by central banks since the work of wunderkind ran the MAS–monetary authority of Singapore and could run speculative markets in currencies–especially in the Asian time zone.Excellent point indeed
April 9, 2019 at 4:45 pm |
Well said Asherz but I still keep a mental note on technical levels. In the FT 5 April (last Friday) there is a great article “Chinese bond expansion puts ratings in spotlight” on page 19 and subtitled “Default Fears”