China’s speculative bubbles are fueling a false narrative that China’s on the up and up. Nothing could be further from the truth, but the fact remains that these speculative bubbles are producing second and third order effects that investors watch closely, such as the strengthening Aussie Dollar and Chinese inflation.
As Chinese citizens AND companies increase speculation in iron ore and other commodities that Australia exports, the currency strengthens.
“Steel futures also soared despite concerns about a glut of steelmaking capacity, according to economists. Jiangsu Shagang Co., a publicly traded steelmaker that posted a loss for 2015, swung back to profitability in the first half of this year partly because the steel-futures jump made Shagang’s rebar worth more.
Even Shagang is a speculator. To offset a difficult business climate, Shagang has diversified into “financial futures…venture/risk investment, real estate, etc.,” according to its website. Shagang declined to comment.”
If Shagang was only speculating in Steel futures that would be bad enough, but the firm was desperate to make a profit and even began investing in the increasingly risky Wealth Management Products WMPs.
“In late 2015, Shagang’s board authorized the company, based in China’s Jiangsu province, to buy $600 million of wealth-management products.”
As a result of all this rampant speculation commodity prices in China have been pushed through the roof.
I think you get the point. Unsurprisingly, these speculative driven commodity rallies have started to impact the real economy. In September, China reported its first YoY PPI gain since 2012.
This spark of inflation has given markets and investors a false hope that China’s economy has started to rebound. I think now is a great time to be able to see the forest through the trees and recognize the “rebound” for what it truly is, a speculative fueled bubble. Of course, the most important and impossible to answer question for any bubble is “When does it end?”.
Now the Aussie dollar is attempting to break above a +20 month downward trend line against the Yen as well as the 50 percent retracement of the 2009-2013 move. As of writing this article I had to change the graphs to show it touched the 50 percent retracement level before ducking back below the trend line.
With gold up, and both US stocks and treasuries down today, it looks like the market is finally realizing Trump might win this election.
The Yen too has strengthened. I remain a Yen bull until the market undergoes a phase transition. Currently the BOJ has instituted a yield control policy that would force it to buy all the bonds that are sold above a certain yield. The only way Japanese investors would sell their JGBs is if they feared inflation were to pick up. Looking at the chart below, the odds of that happening within the next 6 months are quite slim. I suspect, JGB yields will stay low especially with the central bank buying way more than the government is issuing.
With the BOJ unable to weaken the Yen, their stock market and economy should continue to implode. In the end, you cannot escape economic gravity, and with the SPY falling below a key level today, I expect more weakness to come.