Daily Analysis 5 September 2022 (10-Minute Read)

A terrific Monday to you as European stocks and Euro sink as energy woes worsen.

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In brief (TL:DR)

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  • U.S. stocks closed lower on Friday with the Dow Jones Industrial Average (-1.07%), the S&P 500 (-1.07%) and the Nasdaq Composite (-1.31%) all down.

  • Asian stocks slumped on Monday, paced by losses in Hong Kong.

  • Benchmark U.S. 10-year Treasury yields soared to 3.206% (yields rise when bond prices fall) as assets were hammered across the board.

  • The dollar jumped as commodity-linked currencies joined the euro’s retreat to a two-decade low.

  • Oil rallied before an OPEC+ meeting on supply with October 2022 contracts for WTI Crude Oil (Nymex) (-2.54%) at US$89.08.

  • Gold was little changed with December 2022 contracts for Gold (Comex) (+0.01%) at US$1,722.80.

  • Bitcoin (+0.15%) was at US$19,739, dropping below US$20,000, a key level of support.


In today's issue...

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  1. China’s Weaker Yuan will Drag Down Emerging Markets

  2. China’s Chip Technology Boosted by U.S. Tech Embargo

  3. Bitcoin Hangs Around 2017’s All-Time-High

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Market Overview

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European stocks slumped and the euro fell Monday as the region’s worsening energy crisis added to risks for a global economy already facing high inflation and a wave of monetary tightening.

Markets also face more uncertainty from US-China tension. The Biden administration is considering moves to curb US investment in Chinese technology firms and will allow Trump-era merchandise import tariffs to continue while the levies are reviewed.

Separately, China extended its lockdown in districts of the megacity Chengdu and ordered more mass testing there as it tries to contain a Covid outbreak.

Asian markets were lower on Monday with Tokyo's Nikkei 225 (-0.11%), Seoul's Kospi Index (-0.24%) and Hong Kong's Hang Seng Index (-1.16%) down, while Sydney’s ASX 200 (+0.34%) was up slightly.



1. China's Weaker Yuan will Drag Down Emerging Markets

  • In August, the yuan declined for a sixth consecutive month, capping the longest losing streak since the height of the trade war sparked off by the Trump administration in October 2018.

  • A cheaper yuan is hammering the export appeal of other emerging markets and sparking competitive devaluations

Foreign currency is really not that complex. The more expensive your currency is relative to everything else (primarily the dollar), the dearer your exports and vice versa.

For the bulk of export-oriented economies, keeping their manufactures cheap means keeping their currencies cheap, and nowhere has this become more urgent than China.

Although the Chinese yuan was reigning supreme as the haven asset for emerging markets, shielding investors from the turbulence of war and runaway inflation just months ago, it’s rapid decline versus the dollar is rattling emerging market currencies that are caught in a Catch-22.

In August, the yuan declined for a sixth consecutive month, capping the longest losing streak since the height of the trade war sparked off by the Trump administration in October 2018.

But a cheaper yuan is hammering the export appeal of other emerging markets and sparking competitive devaluations, as far away as Africa and Latin America who need to keep their exports competitive but also manage rising inflation and a weak currency importing price pressures.

One view is emerging markets that compete directly with China on exports, for instance Vietnam and Bangladesh, will allow their currencies to decline to keep prices competitive.

In the past month, China’s zero-Covid policy, ballooning property crisis and growth slowdown are fueling an exodus of foreign capital, even as domestic inflationary expectations surge.

The yuan was set to fix at a stronger-than-expected level for the ninth straight session as China’s central bank pushes back against its currency depreciation, but the dollar’s strength and the U.S. Federal Reserve’s hawkishness is undermining Beijing’s defensive tactics.

China will report data for August that may show declines in China’s foreign reserves and export growth, alongside a deceleration in services.

But emerging market currencies, especially manufacturers that compete with China, may see their currencies slide further in a race to the bottom that helps no one other than the U.S., which imports these cheap goods.



2. China’s Chip Technology Boosted by U.S. Tech Embargo

  • In response to the fresh restrictions, China is expected to unleash a new wave of funding to boost domestic production of semiconductors and research into the area.

  • Ever-tigher controls on China’s tech sector from Washington will hasten Chinese firms switching to domestic chipmakers to pre-empt being cut off from foreign suppliers.

The U.S. has been steadily restricting the growth of China’s tech sector by limiting access to cutting-edge chip components and machinery on fears that the tech will be adapted for military purposes.

Sales of high-end processors from U.S. chipmakers Nvidia (-0.28%) and AMD (-2.54%) are likely to be blocked by tough licensing requirements, which are used in artificial intelligence systems, forcing China to innovate internally or search for alternatives.

In response to the fresh restrictions, China is expected to unleash a new wave of funding to boost domestic production of semiconductors and research into the area.

In order to replace foreign rivals, the Chinese government has already poured vast sums of money into the chip sector, with state-owned investment funds targeting chip start-ups.

However, the state-directed investment into high-end chips has largely fueled waste, corruption and mismanagement.

In 2020, chipmaker Tsinghua Unigroup defaulted on its bonds despite receiving tens of billions of dollars in government support.

Nevertheless, analysts believe that a string of high-profile failures will not deter Beijing in its quest for chip self-sufficiency.

Ever-tigher controls on China’s tech sector from Washington will hasten Chinese firms switching to domestic chipmakers to pre-empt being cut off from foreign suppliers.

In July, the U.S. Congress approved US$52.7 billion in grants to build chip facilities in the U.S. for those companies agreeing not to fund high-end semiconductor production in China, under the landmark Chips and Science Act.

Opinion is divided on whether China can strike it out on its own.

Some analysts believe that with enough money and ingenuity, it’s only matter of time before China could replicate incredibly complex and sophisticated U.S. tools in the semiconductor manufacturing industry.

Another view believes that China’s efforts to develop a “closed loop semiconductor ecosystem” has already failed.



3. Bitcoin Hangs Around 2017’s All-Time-High

  • Bitcoin spent time below $20,000 for a ninth consecutive day and dropped as much as 0.8% to $19,590 on Sunday, a session in which it failed to crack above that round-number level.

  • Bitcoin has traded largely in the same direction as other risk assets like the Nasdaq 100 as the Fed boosts interest rates amid stubborn inflation.

After a solid unemployment report offered mixed implications for the U.S. Federal Reserve as it contemplates its path on interest rates, Bitcoin, the largest cryptocurrency by market cap, trended downward through the weekend.

Bitcoin spent time below $20,000 for a ninth consecutive day and dropped as much as 0.8% to $19,590 on Sunday, a session in which it failed to crack above that round-number level.

US$20,000 is becoming the “new” resistance for Bitcoin even though multiple technical indicators are screaming “buy.”

Bitcoin has traded largely in the same direction as other risk assets like the Nasdaq 100 as the Fed boosts interest rates amid stubborn inflation.

Weakness in the U.S. equities markets pulled Bitcoin back below US$20,000 on September 2, and bears kept the price below the level during the weekend.

Although sentiment remains negative and it’s difficult to call a bottom, investors who believe in the long-term prospects of cryptocurrencies could take the opportunity to gradually build positions at lower levels instead of trying to catch the bottom.

Alternatively, another strategy would be for investors to buy on the upswing, if or when Bitcoin rebounds and stages a more durable rally

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