There’s A Lot Not Priced Into The Financial Markets

Samantha LaDuc

US Dollar About To Break Higher?

The Fed’s Trade Weighted Real Broad Dollar Index is back to about its highest level since 2003 and global trade volumes are the lowest since the financial crisis.

A break, and we are probably into the next and most destructive phase of $ rally. – @RaoulGMI

Rare Earth Trade War

After President Xi visited Ganzhou over the weekend, a major Rare Earth mining base in China, shares of China Rare Earth extending gains to more than 80% in HK Monday. Related US plays: REMX, LIT, GG, ARU, LYSCF.

China Punches Up The Rhetoric

Chinese President #XiJinping said today after ARM (British chip manufacturer) stops working with Huawei and Panasonic (Japanese manufacturer) also said that they would not work with the China mega tech company:

“On the new Long March, we must overcome various major risks and challenges from home and abroad” “We must be conscious of the long-term and complex nature of unfavorable factors at home and abroad and prepare for difficult situations – @YuanTalks

And

Founder of Huawei…..Ren Zhengfei to Chinese media: “I’ve sacrificed myself and family for the sake of a goal that we will stand on top of the world. To achieve this goal, a conflict with the U.S. is inevitable.” via @GaoYuan86

Huawei Matters To Tech 

Not only is Huawai way ahead of the 5G developers worldwide, they are also the #1 Tech company in China and #2 Smartphone maker in the world.

Samsung’s annual growth in worldwide smartphone shipments declining 10% in the first quarter of 2019, while Huawei surged 50.2%. In the same period, American technology giant Apple’s smartphone growth slid 23.2%. – Daniel Yoo, head of global strategy and research at Kiwoom Securities.

U.S. sectors most sensitive to China as judged by share of sales include Technology, naturally, as well as Autos and Consumer Products.:

US Dollar Matters to World Trade

Have a close look at the dotted red line in the first image: Bank Loans have fallen well below the fold (0 line).

Also note the BIS study that clearly shows the USD impact on global trade (second image).

Global value chain activity is reliant on financing for working capital, and fluctuates with financial conditions. Prevalence of dollar invoicing means that the dollar index is a useful concurrent indicator for trade activity –  Shin of BIS

So Does A Weakening Yuan

Allowing the yuan to weaken beyond seven per dollar could mark a huge shift in the international terms of trade. Bloomberg

My Market Thoughts

I’m going to summarize this as concisely as I can.

Consensus Views:

  1. Most expect Fed to cut.
  2. Most don’t expect that if Fed cuts the 10-year yields go UP not down – as market prices in “better economy” – steepening the yield curve.
  3. Most think Earnings reports are going great and getting greater.
  4. Most expect a market Melt-Up is imminent ala 1995/1999.
  5. Most expect a soft Brexit or none at all.
  6. Most don’t expect the EU Parliamentary elections to threaten stability of the monetary union.
  7. Most expect China to cave.
  8. Most expect Yuan stability / USDCNH 7.0 to be Ceiling.
  9. Most expect Trump to be unimpeachable and win 2020 and Debt Ceiling to be Raised to Infinity.
  10. Most think Volatility is easy to kill.

Color me skeptical.

There’s a lot not priced in.

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Twitter:  @SamanthaLaDuc   @LaDucTrading

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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