Daily Analysis 3 August 2022 (10-Minute Read)

Hello there,

A wonderful Wednesday to you as stocks stabilize with traders weighing the impact of US-China tension.

In brief (TL:DR)

  • U.S. stocks closed lower on Tuesday with the Dow Jones Industrial Average (-1.23%), S&P 500 (-0.67%) and the Nasdaq Composite (-0.16%) all down.

  • Asian stocks stabilized on Wednesday as some of the investor anxiety over tense US-China ties eased, while Treasuries pared a slide sparked by hawkish U.S. Federal Reserve comments.

  • Benchmark U.S. 10-year Treasury yields fell three basis points to 2.72% (yields fall when bond prices rise).

  • The dollar was steady.

  • Oil edged lower with September 2022 contracts for WTI Crude Oil (Nymex) (-0.56%) at US$93.89.

  • Gold fell with December 2022 contracts for Gold (Comex) (-0.39%) at US$1,782.80.

  • Bitcoin (+0.65%) rose slightly to US$23,037 moving in contrast to risk assets such as equities as the correlation between the two starts to drift.


Market Overview

China, which regards Taiwan as part of its territory, announced missile tests and military drills around the island after Pelosi became the highest-ranking American politician to visit in 25 years. China also halted natural sand exports to Taiwan and some fish and fruit imports from the island.

While fears of an acute deterioration in US-China ties appear to have cooled, the ill-will highlights the risk of longer term economic decoupling with an array of potential impacts, such as stickier inflation as supply chains adjust.

Asian markets were stable on Wednesday with Sydney’s ASX 200 (-0.32%) down slightly, while Seoul's Kospi Index (+0.89%), Tokyo's Nikkei 225 (+0.53%) and Hong Kong's Hang Seng Index (+0.40%) all up.



1. China's Real Estate Crisis is Taking the Steel Industry With It

  • China’s steel industry is buckling as a worsening property crisis weakens demand, causing Beijing’s construction-led growth model to look even more indefensible and unsustainable.

  • Prices of steel used for construction have fallen to a two-year low last week as well.

China’s steel industry is buckling as a worsening property crisis weakens demand, causing Beijing’s construction-led growth model to look even more indefensible and unsustainable.

Close to a third of China’s steel mills could fall into bankruptcy amid a squeeze that is probably set to last half a decade.

Beijing’s crackdown on its heavily levered real estate sector is now having unintended and unexpected consequences for ancillary industries, with the key industry contributing as much as 29% of GDP and responsible for as much as 70% of the Chinese economy.

Although Beijing has dialed back some measures to restoke the fortunes of its real estate sector, such as encouraging lenders to make mortgages more readily available, rolling zero-Covid lockdowns have proved a drag on sentiment and stymied any remaining demand for apartments.

Beijing continues to vacillate when it comes to doling out bailouts for some of its largest and most embattled property developers, including China Evergrande Group, which was one of the first to show signs of weakness.

Inconsistent legislation and application of policy have also clouded the outlook for China’s real estate sector, with strict lending limitations still in place in many areas and Beijing allowing homebuyers to default on mortgage payments pending the completion of unfinished projects.

A steel purchasing managers index for July tumbled to its lowest reading since 2008, the year of the Financial Crisis and Goldman Sachs sees a 5% fall in demand for steel this year.

With the property sector accounting for a at least a third of Chinese steel demand, China’s economy is rapidly running out of time to round the corner on an industry that has been the cornerstone of its growth model for the past several decades.

In the near-term, the main challenge for steel is the large stock of unfinished properties, as seen by a flood of recent mortgage boycotts.

Prices of steel used for construction have fallen to a two-year low last week as well.



2. Already Tense Markets Whipsawed by Pelosi Visit to Taiwan

  • Already strained ties between Washington and Beijing have been stretched further with Pelosi’s visit to Taiwan, the highest U.S. official to visit the territory in over 25 years.

  • Across the Pacific, Chinese stocks were not spared either with Hong Kong’s Hang Seng index falling as much as 3.2% before recovering slightly and China’s CSI 300 falling 2.8%.

For several tense hours yesterday, millions of users tracked the progress of SPAR19, the callsign of Nancy Pelosi’s U.S. Air Force VIP transport jet that flew on a long dogleg east across much of Borneo before taking a sharp left to track northwards for Taipei.

Right up to the very last minute, Pelosi’s visit to the territory that China considers a renegaded province was uncertain and millions of users crashed the FlightRadar24 website tracking the progress of SPAR19, to guess where it would ultimately land.

Already strained ties between Washington and Beijing have been stretched further with Pelosi’s visit to Taiwan, the highest U.S. official to visit the territory in over 25 years.

The benchmark S&P 500 dipped 0.1% while the tech-heavy Nasdaq Composite climbed a 0.2% on expectations on bets that the U.S. Federal Reserve would be less aggressive with its rate hikes.

Europe’s Stoxx 600 fell 0.2% while the MSCI’s broad index of Asia-Pacific stocks declining 1.3%.

Pelosi’s visit saw China ramping up its military activity bordering Taiwan with numerous Chinese fighter jets seen flying close to the median line dividing the Taiwan Strait, but not crossing it at the time of writing.

During the Clinton administration, China fired missiles into the waters just 100 miles north of key Taiwanese ports while Washington sent the Nimitz carrier battle group to the Taiwan Strait in a sharp escalation of tensions.

Shares in U.S.-listed technologies that rely on China for a large segment of their sales nosedived, with the Philadelphia Semiconductor index dipping 0.3% and Intel shedding 1.9%.

Given the level of rhetoric that Beijing has brought to bear on Pelosi’s visit to Taiwan, it’s unlikely to back down now and fears are that both robust military and economic measures may be imposed at a time when the global economy can least afford it.

Thin summer trading volumes could also exacerbate price movements if geopolitical tensions escalate.

Benchmark U.S. 10-year Treasuries gained initially on tensions, but pared gains by the end of the trading session and the yield curve, normally seen as a precursor to a recession, inverted even further.

Across the Pacific, Chinese stocks were not spared either with Hong Kong’s Hang Seng index falling as much as 3.2% before recovering slightly and China’s CSI 300 falling 2.8%.

Investors can expect greater volatility as Beijing’s response to Pelosi’s visit is rolled out in the coming days and weeks, but make no mistake about it, the country’s politicians are unlikely to backdown from what it will no doubt interpret as a serious provocation.



3. Binance.US Voluntarily Delists Cryptocurrency SEC Deems Security

  • On Monday, Binance.US announced that it was in the process of delisting AMP, which had been classified as a security by the SEC in a recent insider-trading case involving Coinbase Global.

  • Binance.US stated that will discontinue trading of the AMP token until more clarity around its classification materializes.

In an effort to demonstrate its willingness to be regulatorily compliant, the world’s biggest cryptocurrency exchange by market volume’s U.S. arm, Binance.US has voluntarily delisted one of the cryptocurrencies singled out as a security by the U.S. Securities and Exchange Commission.

On Monday, Binance.US announced that it was in the process of delisting AMP, which had been classified as a security by the SEC in a recent insider-trading case involving Coinbase Global (+7.22%).

AMP is one out of nine cryptocurrencies that the SEC identified as securities in a lawsuit in July, which alleges that three individuals, including a former Coinbase Global employee were guilty of insider trading.

Under U.S. law, securities are subject stringent investor-protections and disclosures both for platforms as well as issuers and must be registered with the SEC.

Referring to the SEC’S Case, Binance.US said in a blog post that the firm operates in a “rapidly evolving industry” and that their “listing and delisting process are designed to be responsive to market and regulatory developments” without making any reference to the SEC insider trading action.

Effective from August 15, Binance.US will be removing AMP from its exchange “out of an abundance of caution”.

Binance.US stated that will discontinue trading of the AMP token until more clarity around its classification materializes.

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