Take Five: Trade War II

(Reuters) – 1/THIRD LAW OF TARIFFS

China’s exports rebound has been quickly overshadowed by dire predictions of Trade War II between the world’s two biggest economies.

Markets are hoping Donald Trump’s threats to penalise China for COVID-19 are pandering to Americans’ fear of China during an election year. After all, neither side can afford to further knock business confidence at a time when the world faces the worst economic contraction on record.

In response to U.S. talk of slapping on more tarriffs, stopping U.S. pension money from investing in China and even stripping it of sovereign immunity, China has only offered verbal rejoinders so far. But could it decide to renege on its trade deal commitments to purchase U.S. agricultural products?

Beijing has been courting American companies such as Tesla and Starbucks, but it’s also looking more inwards for growth. While there were some signs the two countries’ trade negotiators were making progress, should Trump’s threats continue, trade war might take over from coronavirus as the main worry for markets.

Top U.S., China top trade officials agree to strengthen cooperation –  

Trump says could say in a week or two whether China adhering to trade deal –

China says tariffs should not be used as a weapon after U.S. threats-

For a graphic on China TSF, GDP and markets, click here

2/SPEED BUMP FOR STOCKS

Having defied reams of poor economic data, U.S. stock markets must contend over the coming week with more evidence of how the pandemic is devastating the economy.

With swathes of the economy locked down, economists polled by Reuters expect retail sales tumbled 10{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} in April, surpassing the record 8.4{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} drop in March. And with factories shuttered, industrial production is forecast to have dropped 11.6{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} after slipping 5.4{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} in March. We also get a peek at numbers related to consumer sentiment and inflation.

Will these numbers finally derail the rally in the S&P 500, which has lifted it more than 30{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} off March lows? Perhaps not; after all, data showing the loss of more than 30 million jobs during the past six weeks has not managed to do that.

For a graphic on Disconnected – Economic data vs. stocks, click here

3/REHEATED TURKEY

The plummeting lira and Turkish accusations that foreign banks mounted a “manipulative attack” on the currency revived memories of the country’s 2018 crisis. The lira has slumped to record lows, the coronavirus is bringing deep recession and recent months have seen the central bank burn through a quarter of available forex reserves.

Will its troubles ensnare other emerging markets, many of which are only just resurfacing from under the rubble left by the COVID-19 rout? A degree of such contagion was seen in 2018 when lira weakness dragged on currencies in South Africa, Mexico and Russia.

This time Brazil’s real may be the weak link. It has tumbled to a record low through 5.80 per dollar after a large interest rate cut from the central bank.

South Africa’s rand and Mexico’s peso are also worth watching. Both have performed poorly this year, having lost 26{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} and 22{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} respectively.

-Turkish lira hits record low; reserves, funding worries weigh

-GRAPHIC-The Turkish lira’s perfect storm

-Brazil real drops to new low after rate cut, 6.00 per dollar now in sight

For a graphic on Emerging market currencies slide, click here

4/EURO BASHING

Having racked up the biggest weekly loss in more than a month, the euro looks headed for more weakness.

A German constitutional court told the European Central Bank to justify its bond-buying programme or risk losing the Bundesbank’s participation in the scheme. That handed what is considered the only game in town for rescuing the euro zone – the ECB – a setback that jeopardises future bond buying.

Several banks swiftly downgraded their forecasts on the single currency after the May 5 ruling.

It’s unlikely economic data can offer respite — an advance reading of the euro zone’s first-quarter gross domestic product on Friday is expected to show a contraction of almost 4{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} quarter-on-quarter, according to a Reuters poll. Perhaps European politicians might draw solace from Britain’s plight — the Bank of England reckons the UK economy may be headed for the biggest slump in more than 300 years.

-Our way or no way? German ECB ruling rocks EU foundations

-Euro divisions may again impede a crisis response -Fed’s Bullard

For a graphic on ECB uncertainty weighs on euro, click here

5/HALF LIFE

For the third time in its short life, bitcoin is about to undergo a “halving” — when the number of new coins awarded to miners of the digital currency is slashed by half. Given previous halvings propelled huge bitcoin rallies, many are wondering what the effect might be this time as the COVID-19 crisis rages.

The first halving occurred in November 2012, from 50 bitcoins to 25 and bitcoin rallied 10,000{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} between late-2012 and 2014. It was then cut in July 2016 to 12.5 bitcoins and prices rose roughly 2,500{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} from mid-2016 to record highs in December 2017 of just below $20,000.

Year-to-date, bitcoin has risen nearly 40{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f}. It stands around $10,000 ahead of the upcoming halving that will take the reward to 6.25. Some doubt the scintillating rallies of the past two halvings can be repeated. Others reckon however that bitcoin, representing a hedge of sorts against the chaos, is well positioned to outperform. They note that during this pandemic its returns have beaten gold, stocks and U.S. Treasuries.

-GRAPHIC-Speculative bet or inflation hedge? Bitcoin in the coronavirus crisis-Heard of bitcoin’s ‘halving’? It’s set to shake crypto markets in 2020

For a graphic on Bitcoin prepares for third halving, click here(002).JPG