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Protrader – May 2019 Market Wrap

//Protrader – May 2019 Market Wrap

XJO Up 71.
RISK ON !

May could only be described as a wild ride, with a low of 6201 being hit on the 14th of May, followed by the surprise election outcome which sparked a rally , resulting in the best single day (110 points) in 15 weeks, with that, the market reached an 11yr high of 6511 on the 22nd: levels not seen since Nov 2007.

However apart from the election outcome, it would be fair to say that the domestic market has continued to be battered by external international factors, whether Brazilian court decisions again impacting Iron Ore prices, or Trump tweets routing the markets world wide, as it did on the 8th regarding the deteriorating US /China trade negotiations.

Until the enormous cloud of uncertainty that is the US/China trade negotiations is resolved, don’t expect volatility to exit the market, as Risk is now definitely back on.
KEY ECONOMIC DATA
RBA held interest rates steady.
Shanghai Index tumbled 5.6% on 5/5 following Trump tweet.
China April Exports shrank 2.7%
DOW JONES IND AVG 26,639 – 24,812: DOWN 1,827.
Stay away in May if Trump is tweeting away

DJI 12 MONTH CHART

The first day of the month became a metaphor for the remainder of May. As we saw back in November, despite continued outstanding domestic economic data, the market buckled under fear of the unknown, exacerbated by Trump’s rogue tweeting.

The Dow started the month at 26,639 opening with a 200 + down day, and literally didn’t look back, having the second biggest single day drop of the year on the 7th, finally closing the month at levels not seen since January, at a monthly low of 24,815, a total loss of 1,824 points was the biggest May drop since 2010.

The two key great unknowns that hammered market confidence:
US /China Trade dispute dramatically deteriorating
Muller Comment regarding Trump obstruction, reigniting the impeachment debate.
With the two key issues book ending the month, the market simply didn’t have a chance to catch its breath, and despite a brief, light volume 300 point drift in the middle of May, the market generally headed south for the entire month.

What is of interest is that despite the two unknowns creating anxiety regarding a possible recession, it is interesting to note that US Qtr earnings ended up 1.8%, which is dramatically different to the forecast 16.8% reduction that was being espoused back In November.

Key Economic Events and Indicators
US Unemployment rate dropped to 3.6%
Labour productivity surged 3.6%
Fed Reserve left Interest rates unchanged
US Housing starts beat expectations
US First Qtr GDP beat expectations

US/China Trade Negotiations: CHINA’S DILEMMA
Despite the bellicose rhetoric that has emanated from Beijing regarding the US’s attempt at rebalancing the trade relationship between the two countries, it is important to understand the fragile position from a Macro Economic perspective that China is facing.

Debt

As one can see from the above chart, China’s debt is pointing in the wrong direction. Whereas the US used the Subprime crisis to clean out bad debt, and make some painful structural changes, China simply covered up the cracks using more new debt to pay off old debt, without fixing the system or resolving underlying bad debt issues.

Only recently China declared its “official” bad debt (lost money) to be $300 B USD, however the unofficial is estimated to be significantly higher, with both private and public sectors exposed.

The consequence is a potential debt spiral leading to a massive financial collapse, therefore China needs to desperately keep manufacturing and selling, in order to maintain borrowing payments.

Investor Conundrum

Private sector restrictions also are exacerbating the situation, which is known as “Investment Conundrum”.

The chart above outlines that Economic conditions are getting worse, simultaneously as realestate investment is increasing, yet the underlying economic conditions that support realestate prices/returns are deteriorating.

People are investing in realestate, because they literally have nothing else to invest in, this has lead to not just “ghost estates” like Ireland (before the GFC), but entire Zombie Cities, where there isn’t a single tenant.

Overall an estimated 65 million apartments sit empty in China, and they are still building, because they can’t afford not to.

Where to from here?

Recently China announced a massive Stimulus Program:
$83 B economic support for banking sector
$125 B Infrastructure spending package
Tax Cuts : To encourage spending
In addition to the domestic spending package, China has also floated the idea of restricting rare earth sales to the US as a negotiation tool as part of the trade talks. The problem with this strategy, is that its undermined China’s position more than helped, as it has simply highlighted China’s limited position: they have already placed tariffs on all US imports, they literally have no where else to go, apart from back to the negotiation table.

CONCLUSION

China needs the trade dispute to be resolved sooner than later, and despite what is said publicly, the Chinese leadership are acutely aware of China’s position, and more importantly what it may truly lose.
OIL PRICE UPDATES: Trump Tweet’s only the start.

WTI Crude – Dropped $8.48: $63.25 – $54.77

Having rallied $6.40 since March, the rout that began with a Trump tweet, stating that the oil price was too high at the end of April set the the trend for the month of May.

Geopolitical events continued to provide a period of support from the 3rd to the 21st of May, however the rapidly deteriorating climate around the US/ China trade negotiations overwhelmed the market resulting in a 6% drop in one day on the 25th, Ironically at the same time that China reported record crude Oil imports.
Key Oil Price Influences
Russian Oil production dropped
US moved aircraft carrier to Middle East
US Crude production steadied @ 12.2 mbpd
China reported record Crude Imports 10.64 mbpd
Saudi Arabia reported both drone attack on pipeline, and Oil tanker sabotage.
US Stock piles 478.8 mb. Up 8.8% from 12 months ago