Australian dollar aflame as trade war, Hong Kong explode

DXY was down last night, CNY cratered, EUR bounced:

The Australian dollar was aflame against DMs though did not break new lows versus USD:

It was mixed versus EMs:

Gold roared on:

Oil fell:

Metals were mixed:

Miners trashed:

EM stocks burned:

And junk:

Treasuries rampaged:

And bunds:

And Aussie bonds:

Stocks fell hard:

US data was soft as the services ISM missed:

“The NMI® registered 53.7 percent, which is 1.4 percentage points lower than the June reading of 55.1 percent. This represents continued growth in the non-manufacturing sector, at a slower rate. This is the index’s lowest reading since August 2016, when it registered 51.8 percent. The Non-Manufacturing Business Activity Index decreased to 53.1 percent, 5.1 percentage points lower than the June reading of 58.2 percent, reflecting growth for the 120th consecutive month. The New Orders Index registered 54.1 percent; 1.7 percentage points lower than the reading of 55.8 percent in June. The Employment Index increased 1.2 percentage points in July to 56.2 percent from the June reading of 55 percent. The Prices Index decreased 2.4 percentage points from the June reading of 58.9 percent to 56.5 percent, indicating that prices increased in July for the 26th consecutive month. According to the NMI®, 13 non-manufacturing industries reported growth. The non-manufacturing sector’s rate of growth continued to cool off. Respondents indicated ongoing concerns related to tariffs and employment resources. Comments remained mixed about business conditions and the overall economy.”

That accounted for the fall in DXY but beyond that it was all trade war, all of the time.

China devalued CNY and followed up with this, at the FT:

Beijing has asked its state-owned enterprises to halt US agricultural goods purchases in a fresh blow to US farmers and traders after President Donald Trump further ramped up tariffs on Chinese imports. Agricultural products, especially soyabeans, have been at the centre of the escalating US-China trade war, with the US insisting that China must make substantial purchases of the crop as part of any trade deal. Before the trade war began, China was the largest importer of US soyabeans, buying 25m-30m tonnes a year. However shipments have plummeted: since the start of the crop year in September it has agreed to buy only 14m tonnes, of which 10m has been shipped, according to official US data. The US delivered just 5.3m tonnes of soyabeans to China in the first five months of this year, against 15.2m tonnes in the first five months of 2018.

Trump’s response was predictable:

Morgan Stanley sums up the obvious:

The dynamics of U.S.-China negotiation and macro conditions mean the next round of tariffs will likely be enacted, and investors are likely to behave as if further escalation will follow in 2019 until markets price in impacts. This supports our core view of weaker growth and skews the Fed dovish.

[Trump Administration] understands the Fed’s trade policy reaction function, then it may also perceive that a more rapid escalation could deliver one or more of three beneficial points ahead of the 2020 election: 1) A quicker, potentially more aggressive Fed stimulus response that could help the economy heading into the election; 2) More time to re-frame the potential economic downside; and 3) A major concession by China (not our base case, but it is, of course, a possibility).

Meanwhile, Hong Kong descended into chaos, via SCMP:

Defiant protesters unleashed chaos and violence across Hong Kong on Monday in an unprecedented escalation of radical action against the government and police, even as the city’s embattled leader toughened her stance and warned that they had gone beyond protests to attack the nation’s sovereignty.

After calling a citywide strike aimed at crippling traffic and daily business, protesters throughout the day and into the night besieged police stations in Tin Shui Wai, Tai Po, Sha Tin, Tsim Sha Tsui,

Wong Tai Sin, Sham Shui Po, Tuen Mun and Tsuen Wan, launching arson attacks at some of them.

Police fired tear gas in flashpoints stretching across seven districts, saying they were using “minimal force” to disperse radical protesters who blocked more than a dozen main roads and three major tunnels, set up barricades, started fires, and attacked law enforcers with petrol bombs, bricks and other projectiles.

More than 80 people were arrested, nine of them in the working-class neighbourhood of Wong Tai Sin, which was caught up in six hours of clashes between protesters and police who fired multiple rounds of tear gas and sponge grenades.

Protesters threw petrol bombs into the police station’s compound and again targeted the disciplinary service quarters nearby, where officers’ families live.

In a shocking escalation in North Point, protesters were attacked in the middle of the road, in full public view, by about a dozen men with bamboo poles.

Demonstrators fought back with metal rods and hurled objects at them, later outnumbering the attackers and chasing them into a building on Fung Yuen West Street.

Angry protesters besieged the building, and broke a window of a flat where two men brandished knives at them.

The running battles in districts wore on into the night, with tear gas being fired in the poorest neighbourhood of Sham Shui Po, where protesters and residents clashed with police.

And on it went.

We’re entering full blown risk off territory here with Australia caught right in the middle of the sundering of Chimerica. So long as it runs, also expect the AUD to burn.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. Hmmmm….does smell like more short term reasons to buy gold and gold miners.

    Not yet convinced to buy and hold gold – as the risk of a run to the USD remains strong to me – but it’s harder to ignore the short-term signals at least…

    • Zero yielding gold will look good in a negative 3-4% interest rate world.

      This time is a bit different.

      • That assumes people continue to be able to service their debts peachy. Unemployment to go higher with iron ore dropping. Confidence in any property rally will be shot if this share rout goes on…

      • Nah mate. It just assumes people will need somewhere to live.

        If people Can’t service their debts, yields on houses will go much higher.

      • Yields crash right along house prices; see Dublin during the GFC where rents got crushed.

        The bargaining power is all one way, and it ain’t with the negatively geared landowner that is sweating bullets trying to attract renters in oversaturated market (supply side).

      • You’ve got to let go of the Irish wet dream, mate.

        You will be happier in the long run.

      • Come to grips with Australian housing as a bubble, it’ll prevent future capital losses… large losses.

    • With gold, make sure you get the hard, heavy, shiny stuff, not the pretend stuff on the computer screen.

    • BurbWatcher, just because a few members on this site keep writing that the USD is going to go up doesn’t mean that they are correct.
      The Fed is going to cut/slash rates.
      Once or twice for an adjustment or to below 1%.
      How will that affect the USD?

      • Why would the Fed be dropping rates by +150 basis points? And what state is the rest of the world in while this is happening? You are talking recessionary moves and so the USD catches safety bid.

      • Brenton – FED will cut because Trump wants them to cut. Simple. Don’t overthink this.. Did FED really had to cut earlier??

      • Nik, if the Fed is cutting +150 basis points, it’s because of recession.

        Ignore the bond market at your own peril.

      • Brenton, I am talking recession or major slowdown.
        I think that the Fed will try and prevent this by slashing rates.
        A shock may cause the USD to rise, but it can hardly be a shock (brexit, tariff war) if everyone is aware of the possibility of these events occurring.
        The Fed might be slow to move, but they are not idiots, and they will move to prevent a worsening slowdown.
        You are right about the bond market.

      • You’ve just described every recessionary easing cycle ever. They never call it that, not until long after the fact.

      • Andrew, I guess I am curious as I am long usd for a portion of wealth. usd doesnt go down on its own as an independent commodity, for it to be lower, some other currency has to go up.
        In the scenario you describe, especially given the strength of us economy compared to ROW right now, which currency do you expect to appreciate against the usd?
        That recessionary scenario seems to be worse for everyone else right now than the u.s.

    • Burb stay short your equities, think you have another 10% plus move lower
      Don’t panic on gold, be patient
      USD is weak now but will find strength
      Always remember “the sheep get taken to the slaughterhouse”

  2. Is this how reusa feels when gorging on a mortgage?

    Gorge (verb)

    Synonyms: stuff, cram, fill

  3. Ronin8317MEMBER

    Actually, it is ‘currency manipulation’ that prevent the RMB from going when lower. Remove capital control, and it’ll go to infinity and beyond against the USD.

      • The Traveling Wilbur

        “To tend to zero, and beyond!”. Just doesn’t have the same ring to it does it? Maybe “To Euro GDP and below!” from now on?

        Or:”To central banker IQ level, and beyond!”. maybe.

        PS “let go of the Irish wet dream…”. Gold. LOLd.
        PPS I *used* to think that was a pint of guiness and *two* potato cakes.

  4. If this goes on I wonder if trump will resort to plan b heading towards next years election and start something with Iran.

  5. Global Economy is headed down very hard into global financial crisis 2.0 Q1 2020

    (solar cycle 24 bottoms Q1 20, solar cycle 23 bottomed out right on GFC)

    It’s very likely we will see deep global recession by Q4 2019
    A European bank collapse by end of this year that will spread like contagion
    Think Aussie cash rate could be zero by Nov RBA meeting
    Aussie Gov bonds deep negative by Xmas
    Global Equities to be pounded
    A major Australian Banking collapse/bailout by Q1 2020
    Aussie Home loan interest rates to double or more next year
    With Aussie house prices down at least 40% from peak by end of 2020
    Australia is headed into the next Great Depression by H2 2020, as we head into solar cycle 25

    I’ts Awwwwnnnn and It’s about to get very ugly!!!!, we are 6 or so months from an Australian Bank Collapse/Bailout

    If you laugh at this you are really laughing at yourself for lacking insight on how the world really functions

    • HairyMaclaryFromDonaldsonsDairy

      I’ll just park this here
      “I am overseas as a crisis is brewing which many might rename the “Lehman Moment” to something more up to date. Clearly, the stakes are far higher to the world economy than anyone may truly appreciate. We are cascading toward a perfect financial storm. However, this particular storm is exacerbated by the politics of Europe stemming from the structural design of the Euro. There is a major risk to both the European and world economy. All the Quantitative Easing by Draghi at the European Central Bank (ECB) has completely failed and in the process created a systemic risk to the entire world economy – not just the EU. This is why the Federal Reserve (Fed) has lowered interest rates when there was no true justification for the interest rate reduction domestically. The Fed has confirmed that it is indeed the central bank to the world even if it does not like that role. It can no longer place domestic policy objectives over international.”
      Martin Armstrong

    • bcnich, your recession call/major slowdown is not a problem.
      It’s your DXY to 150 and gold plunging which has raised a few eyebrows.

      • Andrew
        I never said gold would plunge. I said it would go lower on the premise that USD would rise first taking commodities down
        This is what happened in the GFC first up
        I like gold but I am not buying here is what I wrote
        I believe at some stage the USD will rise but it doesn’t seem to want to go higher.
        I think bond yields are really telling us where Aust economy is going.
        It’s a disaster.
        I really believe that nature, sun etc has a huge effect on all of us and I am surprised it’s not discussed more
        DXY is really Euro and I believe the Euro will eventually break up
        For MSM and Gov ti be encouraging people to get into more debt is a disgrace
        I think we will see an Aust bank collapse next year

      • bcnich, the USD will rise when the fed stops its easing cycle.
        It is only the easing cycle that will weaken the USD.
        Once the easing cycle is over, the USD will rally because the US economy is far superior to the others e.g. less debt, better demographics etc.
        My apologies. I think you said gold will fall with the rising USD. You didn’t use the word plunge.

      • Andrew
        We are all guessing, let me change to 120 DXY
        You are probably right re Fed easing

        For me I keep it very simple
        Long Aussie bonds, Long Aussie Corp Bonds, no shorting any more.
        I hold USD but I have reduced yesterday in 67s but still hold
        I am going to buy equities again but lower
        I am going to buy gold and silver but I am holding on and waiting
        I want to buy a couple of art deco units when houses prices get pulverised which isn’t too far away.
        I want to own food commodities as well, metal miners
        Just want to be very diversified
        I used to be a currency trader and it’s so hard to guess currency, think market is much more manipulated these days.

      • I didn’t want to forecast but 10 year Aussie bond yield just got hammered, I think Aust might invert at the long end, that being Aussie 10 year yield might go under the 5’s which takes the 10’s from 0.97% now to 0.60%
        This is getting very ugly
        How anyone can predict a house price recovery of any decent amount is beyond my comprehension
        This feels like just before the GFC, there was chaos in the world economy (serious) and aussies walking around deluded about their house prices.
        This isn’t going to end well for Australia

      • @Bcnich which bank do you think will fail? I personally think Westpac. I have some cash with them. Thinking of moving it or at least spreading it further out.

        I agree this feels like GFC 2.0. it’s taken longer than I thought, but I think we might have arrived. I had planned to quit my job in the next 6 months and move to Melbourne. Maybe I should try to stay lol.

      • Gav
        Honestly I don’t know about particular banks
        My guess is more banking sector, they might have to merge banks in an emergency play to bail in bail out etc

    • my guess..
      Gold will go much higher from here. Anywhere between $1500usd – $1550usd and then will fall to around $1450usd which is still good price considering good chunk of these falls will be offseted by the falling Poo. But lot of gold stocks will fall much lower on the fear that gold is going back to $1100usd.
      This is why I am selling some stocks and waiting for that moment to load up again as once gold falls next move will be over $2000usd – most likely higher than $3k in USD. This will be the point when sh1te hits the fan and everyone realises no one will or can repay their debt. Not without massively devaluing one’s currency.
      But then again this time might be different and everyone joins China and soon US in cutting, even going aggressively into negative IRs and gold just continue on its way to Pluto.

      • Just a guessing game Nikola
        Just Bloxo and Craig James get paid $1M large to be constantly wrong ????
        I think if you are right, noone would pay you becuase noone really wants to hear the truth

      • Nikola, you and your gold stocks are on a winning strategy as long as the USD falls. However, no trend lasts forever.

  6. “Are you listening Federal Reserve?” – LOL – and there is it is next cut is baked.

  7. reusachtigeMEMBER

    Oh man, I should have brought a tin foil hat with me before reading this rubbish!

  8. Blatant FX manipulation is great as it will force everyone to confront the hidden manipulation that has been going on for years.

    Regulation of capital inflows is within the power of every government.

    The sooner they start exercising the power the better

  9. When England leaves the EU it will pretty much just be France and Germany controlling the entire edifice with the PIGS getting crushed.

    If the UK leaves – and goes ok will Greece stay ? Spain ? Italy ?

    If another country goes that is the end of the EU – it simply could not survive in any realistic way. And in my view once the UK goes another is sure to follow.

    If that happens – Germany is finished (temporarily of course) – but massive recession.

  10. I have one comment about this thread, LOL! There’s one genius predicting the economy based on solar cycles hahaha

  11. Just sold MOY – not exactly ALK profit but not complaining. Saying this as I listed MOY as speculative buy the other day and in case someone bought. I lost confidence in the management and took advantage of the latest announcement to exit. I might be making a mistake but fck it. I am happy with the what am taking to the bank.