The Radix Market View: Take It Or Leave It
“Take it or leave it”. The saying conjures up memories of childhood, when parents decided enough was enough. Or, in adulthood, when the street trader in that far-flung market stall has been negotiated down as far as they will go. When even the threat or pretence of walking away does not cause them to change their mind. The inviting smile that lured you in has faded and been replaced by a near angry countenance.
But what happens when the same, uncompromising, stance is applied to far more serious negotiations with global consequences?
The last update we published on the state of the UK and global economy spoke about caution tinged with optimism. Back then, a US-China trade deal appeared to be within reach; even a brief extension of Article 50 in the UK-EU BREXIT negotiations was considered to be a good thing. Better, after all, than crashing out with No Deal. So much has changed since then. Much of the optimism that did exist back then has seemingly been sucked into nothingness. With one particular exception…
The crypto market recovery, which began earlier this year, has continued to gain traction. After plunging the depths of $3,200 lows, Bitcoin prices stand at just under the $9.793,11 mark today. That is equivalent to a 300% price increase. But is this the end of the crypto-winter, as some have called it, or simply a false spring dawn?
The price movements of other crypto-currencies would suggest that, at least for now, winter’s coat still hangs on. Bitcoin is the only major crypto-currency to have, so far this year, exceeded its 2018 highs, although it has since fallen back a little. At its peak last year Ethereum was trading at over $600 per ETH. Today, with BTC having recovered to near 2018 highs ETH is still trading at just $256. It’s a gain of 150% from its February 2019 low of $101 but is c. 60% lower than its 2018 high. The breaking of the usual correlation between BTC and its smaller cousins would suggest that other forces may well be at play in the crypto markets. In many cases, you would expect to see bigger price movements in the smaller cryptocurrencies than you would in BTC.
Possible market manipulation can never be ruled out. The Binance breach at the start of May 2019 did not affect the BTC price rise. In fact, the BTC price increased $200 the day following the announcement of the hack. Not even the indication, by Binance’s CEO, that he had contacted parties to discuss a roll-back in the blockchain (in order to recover the stolen BTC) caused the BTC price to slow. Historically, we might have expected prices to drop. As the fixed supply crypto reserve currency, there are enough players (the so-called ‘whales’) that hold material proportions of BTC to move the market. The other suggestion is that the existing price rise is built on borrowed funds (leverage).
We cannot say for certain yet whether the price increase in BTC is representative of a sustained bull run. The market has, for now, seemingly paused for breath somewhere between the $7,500 and $8,500 and we must wait a little longer to witness its next move.
The UK & Europe
A few weeks is a long time in politics and, indeed, it is increasingly difficult to separate the economics from the politics. Take, for example, acting Prime Minister Theresa May’s resignation a few weeks back. That has led to a Conservative leadership race in which the main point on which the potential candidates appear to be competing on is who can be “toughest” in BREXIT negotiations and claim to be ready to walk away on deadline day.
BREXIT is, undoubtedly, going to continue to be the foremost issue for the UK economy until such time as we agree to a deal, leave without one or revoke Article 50 altogether. Following a further BREXIT deadline extension to the 31st of October — Halloween, no less — the impact of uncertainty on the UK economy is beginning to show. Preliminary GDP figures for April show the UK economy shrank by 0.4% from the previous month driven, largely, by a fall in manufacturing and, in particular, car output. The impact of BREXIT uncertainty on the UK’s motor industry was underlined last week when Ford announced the closure of its Bridgend engine manufacturing plant. Whether the UK’s motor industry will recover from all of the recent closures is yet to be seen. More recent data from the IHS Markit / CIPS Purchasing Manager’s Index points to a further slowdown in UK manufacturing output, in part because BREXIT stock-piling has eased. With the BREXIT deadline date having shifted (again), manufacturers are working to unwind the stockpile of goods that had been built up prior to the original date in March.
Germany’s economy continues to be of increasing concern. As the engine of European growth, how well the German economy performs generally has an impact on the rest of Europe. German exports (-0.5%) and industrial production (-1.9%) have been falling. The decline has been driven by weakening global trade, largely attributed to the US-China trade war. Germany exports much of what it manufactures and demand for its products (including cars) has been falling. To underline the point, The Bundesbank (Germany’s Central Bank) has downgraded its growth forecast from 1.6% to 0.6% for this fiscal year. This will put the German economy into the camp of some of Europe’s slowest growing economies in 2019.
Whilst growth appears to be stalling across the Eurozone, unemployment continues to fall. It has now reached a post-crisis low of 7.7% compared to 8.5% at the same time last year. Falling unemployment and record employment levels appear to be a trend in many developed countries (including the UK and Europe), with employment levels showing strongly even as economic growth appears to be stalling. Much of this is being attributed to changing forms of employment, including self-employed gig economy workers.
The US-China trade war and BREXIT continue to be a drag on the Eurozone, not least due to the further delays or stalled processes.
The US-China trade war is an issue that continues to dominate global economics and all bets are off. For now. Following, what appeared to be, progress earlier in the year, in which the March 1 deadline for a deal to be agreed was extended indefinitely, talks stalled unexpectedly in May. The US immediately increased tariffs on $200bn worth of Chinese goods from 10% to 25% and has begun the process of instituting tariffs on a further $325bn worth of Chinese goods. China, for its part, immediately retaliated by imposed tariffs ranging from 5% — 25% on $110bn worth of US goods. Both sides blame each other for the trade war and stalled policies; Beijing, notably, released a white paper setting out its impact, China’s position and its requirements for a deal which the US subsequently rubbished as a misrepresentation.
As if the US did not have enough on its plate with China, in June President Trump threatened to impose tariffs of 5% on all goods imported from Mexico into the US if Mexico did not stem the flow of illegal migrants across the US-Mexico border. These tariffs were set to increase by a further 5% every month — up to a maximum of 25% — if Mexico did not act. The US and Mexico have since come to an agreement and the threatened tariff increases have been put on hold for 45 days (until mid-July) to give Mexico time to show that it is doing enough to curb illegal immigration.
US jobs growth suffered a shock slow-down in May. Just 75,000 jobs were created compared to analyst expectations of 185,000 new jobs. Even so, US unemployment remained at an historic low of 3.6%. The US Federal Reserve, which recently signalled that it would hold back on its recent policy of gradual rate rises appears to now have a more difficult decision than just the dichotomous hold or increase rates decisions it has had to make recently. With unemployment falling, inflation muted and the US economy still facing the “cross-currents” from a slowdown in Europe and China the decision on whether to hold or increase rates may well turn into a decision on whether to hold or cut rates.
China’s main economic concern currently is the US-China trade war, and the impact this is having on the Chinese economy. China has set out some of the impact that the trade wars have had on its economy in a whitepaper it released after trade talks with the US stalled. Export volumes to the US fell by 9.7% year-on-year in the first four months of 2019 and direct investment by Chinese companies into the US dropped 10% in 2018. By May 2019, US exports to China had fallen for eight months in a row and US direct investment into China, in 2018, increased just 1.5%. A further increase in tariffs, or the expansion of tariffs to other goods and services, has the potential to put a further, significant, dent in Chinese economic growth.
The poster-child for the US-China trade war is, undoubtedly, the Chinese technology and telecoms firm, Huawei. The US has encouraged US allies (including the UK) not to use Huawei’s 5G equipment in their telecoms networks and requested the extradition of Huawei’s CFO (the daughter of the founder) from Canada. In May, the US increased pressure on Huawei when it added Huawei to its “entity list”; a sanctions list of companies US firms cannot trade with unless they have a licence. Huawei uses a lot of US technology — from chips to applications — in its equipment and consumer electronics.
China continues to focus many of its growth prospects on domestic demand stimulus and supply-side reform. The government cited room “for fiscal and monetary manoeuvres”, should any be needed, in its whitepaper. In addition to policies (such as increased investment in infrastructure projects) introduced in recent months, China is also opening the door to investment in markets where this has previously not been allowed.
With no official resumption of trade talks having yet been scheduled since the last round ended in May, many will focus on President Trump and President Xi’s meeting at the G20 summit, in Japan, at the end of this month for a view on where this fight will go next.
In short, these are uncertain times in which the rules of engagement are constantly evolving. What is offered today may not be on the table tomorrow. Take it or leave it. Uncertainty makes it difficult to plan for the long-term but can also present an unexpected opportunity.