May 22, 2018
Asian markets show a bearish tone in the face of U.S. leadership
Asian markets were weak on Tuesday, May 22, not reacting to the gains seen on Wall Street. Optimism about the easing of tensions between China and the United States seemed to fade slightly.
In Japan, mining companies and insurance companies led the losses. Australia's S&P/ASX 200 index fell in all its sectors. The country's four major banks were lower, as well the large mining companies.
Despite the sense of calm in the markets, now that trade tensions between the world's two largest economies have subsided, some are still waiting for changes until the scope of the agreements is proven.
The Dow closed about 300 points up. On Monday 21 May, investor sentiment was also boosted by news of trading activity. Trump's advisor, Larry Kudlow, said the tariffs remain on the table as a tool of pressure in talks with China.
Following the U.S. withdrawal from the agreement with Iran, Pompeo demanded major changes from Iran and said the United States would not allow them to develop a nuclear weapon `not now, not ever'. This is just the beginning and the sanctions will be painful. It will be the strongest in history. Among other demands, Pompeo said Iran must stop developing ballistic missiles.
Goldman has stated that there should be no concern about raising interest rates until the yield on ten-year Treasury notes reaches 4%.
The Dollar rose to a five-month high against most of its major currency rivals on Tuesday as U.S. bonds rallied and some relief was provided by the easing of trade tensions.
Oil prices rose on Tuesday amid concern over the drop in Venezuela's crude oil production. Also because of possible sanctions against OPEC member countries.
Gold prices fell slightly, to around the 2018 lows of the previous session. It does so against a strong dollar and for the optimism in world markets that curbed the appetite for the precious metal.
European markets are expected to open Tuesday's session lower.
Situation in China
At the weekend, an agreement was reached to suspend tariffs and it seems that US exports to China will increase considerably. This applies not only to the industrial sector, but also to agricultural products. It is generating strong increases in everything that belongs to the agrifood ecosystem. Energy exports could also increase.
Within the Dow Jones, the biggest beneficiaries on Monday, May 21, are precisely the large industrial and manufacturing groups. Values such as Boeing or Carterpillar are the ones that are showing the most upward enthusiasm.
Europe continues to be caught up in the political risk posed by Italy. European assets are experiencing a lot of volatility on Monday, May 21. Except for the public debt that is falling considerably and dragging down the Spanish public debt. It also gets the banking sector into trouble.
Fear of an oil at 100 dollars
Oil production problems in Venezuela and Angola, coupled with Iran's withdrawal from the nuclear pact, have triggered the oil market deficit and eliminated excess stock.
All this has raised the price of oil to 80 dollars a barrel, making it difficult for Western countries to keep score. In Spain, the increase in the price of the product could mean an additional cost of 9,000 million euros for imports.
It has been a long time since there has been a break in the escalation in the number of oil installations, but last week's reading relaxes the number of new installations.
The number of active oil installations indicates an increase of one unit and the difference, with respect to last year, is 145.
United States temporarily suspends tariffs on China after agreement is reached
U.S. Treasury Secretary Steven Mnuchin said the agreement affects $150 billion in tariffs.
They were to be imposed on hundreds of Chinese products, which Trump had threatened because of intellectual property issues and to force Beijing to balance the bilateral balance of payments.
The beginning of the agreement between China and the USA was the big news of the weekend and the factor on which the American futures are based, those are rising slowly.
The announcement from China is reassuring but, for the moment, a mere declaration of intent that does not specify any concrete plans or measures. China says it will buy more U.S. products to help reduce the chronic trade deficit.
The quantitative contraction
Quantitative expansion has allowed a huge volume of toxic assets to be hidden in central bank coffers. The Federal Reserve has begun the reverse function of slimming its balance sheet, known as the 'quantitative easing' on Wall Street.
The manipulation of financial assets, known as asset reflation, has remotely driven all markets upward. It has distorted price formation, the perception and assumption of risks and the relationships between markets.
Since last summer, US bond prices, and those of many other nations, have changed the trend and are falling, evaporating billions of dollars in the process.
The Fed's desperate search for the wealth effect has not been fully achieved either and the correction in the debt markets would be cancelling out some of that wealth.
When the correction also hits equities, it will start to have an impoverishing effect, which is very adverse to consumption.
As rates go up, dramatic situations arise
Many debtors face serious difficulties.
To begin with, ZOMBI companies created in the heat of an artificial monetary situation are likely to be forced to close with the dreaded knock-on effect.
American companies with very low ratings obtained loans of 564 billion dollars in 2017. Mostly from 'private equity' funds. They surpassed the record figure before the great crisis of 2008. Its indebtedness is unsustainable and is about six times the EBITDA.
Individuals have already begun to report difficulties in dealing with debt on credit cards, student loans or automobiles, are on the rise and rising.
The interest rate that debtors pay, via credit cards, is prohibitive. However, it is the form of loan available to individuals with lower credit quality. It's already up to 15% on average.
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