1. US Targets The Yuan
The latest movements in the US-China trade war have seen the US target one of China’s most important economic tools for manipulating its economy – its exchange rate. This is a big one!
Historically, China has always had a hold over the value of its currency which it would push up or down to suit its export needs, making its products more or less competitive in the foreign markets as was needed. It’s called a ‘managed floating’ exchange rate and it’s one of the key factors that has aided China’s wild growth spurt for many decades.
Recently, China has devalued its currency to offset the effects of US tariffs on its exports and soften the economic blow caused by the trade war. It has been a hallmark of Chinese foreign policy and trade for many years, but now the US is putting its foot down.
By asking China to keep its currency stable, the US is asking to give up an age old tradition of economic manipulation, its protection against all future tariffs and a considerable asset for the Chinese Central Bank. While China is happy to see an end to the trade war it may be a stretch too far to see the country move away from its managed float system.
The Chinese will most likely agree to hold off on any near-term devaluations in the currency, but most certainly not move away from the managed float system all together. Insistence on this point could be a source of considerable friction in the settlement of a deal, but both sides seem eager to reach an accord in the next few weeks. Tick Tock.
2. Palladium’s Hot-Streak Continues
The commodity market has been blown away by its star performer, palladium, which has been on an unstoppable hot-streak since August last year. However, investors are concerned about how much gas palladium has left in the tank.
The trend actually started much further back in 2016 with the rise in demand for catalytic converters which has managed to push the precious metal’s value up over 200% in around 3 years. The strength of the rally has astounded commodities analysts who have been expecting a correction for some time now, but all been disappointed.
Its wild growth spurt has been fuelled by more rigorous emissions standards, a wave of demand for hybrid and electric vehicles which incorporate a lot of palladium-based parts and an on-going shortage of the metal itself. This all comes together to make a price appreciation cocktail that doesn’t look likely to run out of juice just yet.
From a technical and statistical standpoint the uptrend has run much further than expected, reaching the key $1,500 mark during yesterday’s session and is increasingly likely to experience a correction at some point. However, the fundamental picture of a shortage in supply and excess demand continues to drive prices higher with a bullish near-term picture.
So for now, the upside pressures remain firmly in control, but when the correction comes, it will come with force. Be ready when the bubble bursts.
Today we are watching…
1. Southern Company (#south)
US utilities firm, Southern Company, is set to post its earnings today and analysts are upbeat about the company’s prospects. Southern occupies an important share of the US energy market and experienced a strong base rate of growth that looks likely to hold throughout 2019. A number of targeted acquisitions have effectively diversified its business in terms of new gas distribution assets and likely to boost operational and commercial synergies going forward. The consensus EPS estimate is $0.23 (-54.9%) on revenue of $4.66bn (-17.2%).
2. Garmin (#garmin)
Garmin makes an interesting case ahead of its earnings today with analysts very much on the fence about its chances of an earning beat today. The company has been furiously acquiring companies, introducing new products and creating joint-partnerships to expand its portfolio and fuel its growth. Its outdoor segment has also proven to be a great performer throughout 2018. However, weaker demand in its personal navigation devices remains a persistent headwind for the company. Overall, a mixed picture ahead of its announcement, but definitely one to watch.