市場新聞與洞察

Markets are rattled by US- North Korea tensions as Trump vows to respond to North Korea nuclear threats with “fire and furry”. The senior administration officials and Secretary of State Rex Tillerson tried to find different ways to explain the President’s comments and play down the tough talk. Trump reinforced his threats stating “they should be very nervous, because things will happen to them like they never thought possible”.

The standoff has unsettled the financial markets worldwide. The DOW dropped by 200 pips and S&P 500 fell to sessions lows. The CBOE Volatility Index, the best gauge of fear in the market spiked by 45%. [caption id="attachment_58085" align="aligncenter" width="600"] Source: GO Markets MT4[/caption] The demand for safe havens has increased with the rising tensions.

Investors have switched to gold, yen, swiss franc and government bonds. USDJPY dropped to record low and Gold rose to its highest level in almost 2 months.. [caption id="attachment_58086" align="aligncenter" width="600"] Source: GO Markets MT4[/caption] The risk sentiment gets hit by the escalating geopolitical tensions as Japan and South Korea also warned of a strong response if North Korea launches missiles toward Guam. Trump intensifies its warnings to North Korea as he believes that even if Russia and China are backing the UN sanctions, it would not be enough or effective as negotiations have been going on for years.

The Nikkei index fell since the “war of words” started. [caption id="attachment_58087" align="aligncenter" width="600"] Source: GO Markets MT4[/caption] Chinese media warn that the US is engaging in dangerous confrontations. “The US is more powerful than North Korea, but in a real showdown I don’t think they would beat North Korea. There is a Chinese saying: ‘ A man with nothing to lose, doesn’t fear a man with something to lose ” Hu Xijin, outspoken editor of the Global Times said. The coming days will be crucial.

Investors will be looking for a “diplomatic outcome” rather than militaristic conflict. By: Deepta Bolaky GO Markets

In Economics, the difference between 10 Year and 2 Year Bond Yields is one of the leading indicators that help investors to observe any significant changes in the economy. Let's break things down a little further. Firstly, common sense dictates that if you want to make a term deposit in the bank, the rate you can get from the long-term deposit will be more than short term.

Therefore, the spread between long-term and short-term return rate should always be positive, well, in most of the time. However in some historical periods, sometimes the yield spread would be “flatted” (i.e., drop close to zero) or even become negative, in some extreme cases. If that happens, where short-term returns are higher than long-term returns, this is seen as an economic overheat, and a recession is coming.

From the chart below, we can see that the current yield spread is heading towards zero. Since the Fed is guaranteed to have four rate hikes in 2018, and more increases are foreseeable in 2019, the spread is very likely to go negative sooner or later. We'll take a look that the previous cases of the inverted yield curve (i.e., negative yield spread) 1. 2000’s Dotcom Bubble The US Federal Reserve increased its interest rate from 4.75% to 6.5% in a brief time, between Jun 1999 to May 2000, which makes short-term yield soar rapidly and inverted yield curve occurred.

After the NASDAQ bubble burst, the Fed dropped its rates thirteen times in two years, to save its economy. 2. 2008’s Subprime Crisis The same story happened all over again, the Fed first increased its rates 17 times, from 1% to 5.25%. At that time whole world’s economy reached its peak, there is a 6-7% average GDP growth in emerging markets, and even in advanced countries there is a 2.5% growth (which is a lot, compared with today’s growth in the UK) However soon after the crisis triggered, the Fed dropped its rates from 5.25% to 0.00% in only one-year time and kept its zero-rate environment for almost a decade. From the two lessons above, we can observe a similar pattern.

Inverted yield curves consistently occurred near the end of the rate hike cycle, and a substantial economic recession would generally follow. Currently, the US is in the middle of its rate hike cycle, and it seems many of the economic data reveals a sign of overheat. Take the unemployment rate as an example, last month it fell to 3.9%, which is an 18-year low.

The performance of new jobs number is in one of the best periods of growths in recent history. Although previous activity doesn't necessarily predict future outcomes, history suggests once these figures reach their highest possible level, a turning point could be around the corner. There is a saying that lightning never strikes twice, we shall see in this case.

Lanson Chen GO Markets Analyst This article is written by a GO Markets Analyst and is based on their independent analysis. They remain fully responsible for the views expressed as well as any remaining error or omissions. Trading Forex and Derivatives carries a high level of risk.

Sources: TradeEconomics.com

Venezuela: A Latin American Crisis Venezuela’s economy has been in turmoil in recent times with its inflation skyrocketing and with no signs of slowing down, the situation may worsen. The political tensions have also been rising in one of the OPEC (Organization of the Petroleum Exporting Countries) member country whose economy has been slowly declining since the crash of oil prices in 2014. We have seen large protests against the highly unpopular president Nicolas Maduro, who won the most recent in May this year.

However, most people called it a "show election" as it had the lowest voter turnout in Venezuela’s democratic history at 46%. The Economy With the economic and social crisis rising in Venezuela, we have seen the countries inflation rise to new record highs. From reaching 4068% in January, we have seen the inflation reach 46305% last month.

Experts are predicting the number could reach 1,000,000% by the end of 2018, according to the IMF (International Monetary Fund) economist Alejandro Werner and has compared it to Zimbabwe’s hyperinflation in late 2000’s. It is worth pointing out that the second highest inflation in the world is in Sudan at 122%. Shortages in electricity, water, and public transport affect millions of people of Venezuela.

President Maduro blames countries poor economy on an economic war that he says is being led by the United States and Europe. IMF’s Alejandro Werner says that if the country’s economic and social crisis deepens, Venezuela’s economy could decrease by around 50% over the next 5 years which be one of the worst economic falls in over 60 years. "The collapse in economic activity, hyperinflation, and increasing deterioration... will lead to intensifying spillover effects on neighbouring countries," Werner wrote in a blog post. IMF is estimating an 18% decrease in Venezuela’s economy in 2018, up from 15% drop it predicted back in April.

That would be the third double-digit annual decline in a row. Werner said the projections are based on calculations prepared by IMF staff, but he warned that they have a degree of uncertainty greater than in other countries. "An economy throwing you these numbers is very difficult to project," Werner said at a news conference. "Any changes between now and December may include significant changes." The Venezuelan Currency Countries official currency - Bolivar Fuerte (VEF) has weakened dramatically in recent times. 1 US Dollar is currently worth around 206841 bolivars. The Venezuelan government has recently announced it will slash five zeros from its currency.

The announcement was made on 25th July by President Maduro and it is part of a currency reform that was already scheduled for June and was a postponed on two occasions before. The existing Bolivar Fuerte banknotes, which range from 1,000 to 100,000 will stop circulating and will be replaced by the new "bolivar Soberano", which will range from 2 to 500. The new currency is set to start circulating this month.

By Klāvs Valters Sources: Yahoo Finance, Google Maps, Banco Central De Venezuela

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The fourth quarter kicked off with some good news on trade with a last-minute agreement between US-Mexico- Canada just before the deadline. "America first" is the slogan by Trump and he managed to do just that at least when renaming NAFTA to USMCA. The new agreement came with rules for cars and trucks, labour, IP protections and dairy products. After more than a year of tumultuous negotiations, Trump revamped the nearly 25-year old deal.

Markets participants cheered a “Non-Disaster” scenario but continue to be wary of trade tensions. Investors welcomed the trilateral agreement and eliminated the downside risks of a trade war in this part of the hemisphere. Canada and Mexico are the United States’ two biggest export markets.

The largest exports are the automobiles and auto parts while the largest import with Canada is crude oil and gas. *(Data are goods only) While there are a few tweaks, or changes to the new agreement, the dairy and automobile industry emerged as the two main factors that helped all parties to revamp the trilateral agreement. Dairy Industry The dairy industry appears to be the deal maker even though this sector represents a negligible percentage. Canada is not a significant exporter or importer of dairy products, but its supply management system helps them to control their dairy sector and protect their farmers’ income by limiting imports and setting quotas on domestic production.

The US is facing a severe milk glut, and the US farmers are suffering heavy losses. The new deal gives American farmers greater access to the dairy industry in Canada worth 3.6%. The removal of the controversial Class 7 which is a domestic pricing class that governs milk ingredients such as skim milk powder and milk protein is “a win” for the Americans, Australians and New Zealanders.

They have insisted that this new pricing class has effectively pushed them out of the Canadian dairy markets and this was even challenged at the World Trade Organisation. However, some analysts are sceptical of whether this win on Canada opening up its dairy industry will solve the oversupply of milk in the US. Automobile Industry The agreement will reportedly benefit the car-manufacturing workers in all three countries. 75% of the parts that go into a vehicle is required to be made in North America to qualify for tariff-free, and it also requires 40-45% of a car be made by workers earning at least $16 an hour.

The reaction of the markets The deal brought a relief rally in the markets, but investors are aware that the US-China trade dispute is a much bigger issue. The US has a trade deficit of $71bn with Mexico and $18bn with Canada for goods transactions, and it took more than a year of negotiations for the trilateral agreement to be revised. China has a whopping $375.2bn trade deficit with the US and investors are aware that talks will be challenging.

The Asian markets will probably remain vulnerable to the tit-for-tat trade spat between the US and China. The European markets were able to build up the upbeat momentum on the USMCA as Brexit noises, and Italian risks weighed on markets’ sentiments. Investors are reluctant to put their money in those markets when the US stocks are more attractive given that its fundamentals are stronger.

USDCAD fell sharply to 1.2780 before rebounding and consolidating at the 1.2800 level. A lack of fundamental drivers is restricting the pair to make a firm move in a direction. On the technical side, the RSI remains above the 30 mark which is the oversold conditions which may signal that the pair could drop further down before making any correction.

Is it a “win” for Trump? At first glance, it looks like a victory, but the concessions are mostly similar to the TPP, so it is more good news for Canada. It is argued whether the damage done to the relationship was worth it.

Unlike China, Canada was a good ally to the US. Trade tensions are not over as US-China, US-Japan, US-Europe trade talks are still pending.

US Trade vs the World Since Donald Trump became the President of the United States in 2016, we have heard him say a lot about the "unbelievably bad" trade agreements the world’s largest economy has with some countries around the world. We have already seen Trump attempt to renegotiate the North American Free Trade Agreement (NAFTA), which has reached a deadlock, and there is a possibility of the US scrapping the decades-old agreement between Canada and Mexico. But how does the trade balance look between the US and other nations around the world?

Trade Surplus President Trump has said that "We don't have any good deals. In fact, I'm trying to find a country where we actually have a surplus of trade as opposed to... Everything's a deficit." However, there are many countries which the US has a positive trade balance with.

It’s largest trade surplus is with Hong Kong at $29.7 billion, followed by the Netherlands. The US exports reached nearly $37 billion with Hong Kong in 2017 (from January to November) with $6.9 billion worth of goods imported. However, some analysts are suggesting that Hong Kong’s trade with the US will suffer from the ongoing tensions between the two largest economies in the world.

Trade Deficit Trump has aimed some strong words towards the countries which the US has a negative trade balance with. Most of the criticism has been towards the trading relationship with China – the world’s second largest economy. He may have a point as the trade deficit stands at a whopping $344.4 billion (year-to-date).

Trump said – "With China we have close to a $500 billion trade deficit, so we have to do something. I spoke to the president, I spoke to many people — we're going to work on that very, very hard. And we're going to do things that are the proper things to do." The second largest trade deficit is with one of Americas two closest neighbours – Mexico.

Donald Trump has slated the NAFTA agreement in particular, which he has called a disaster for US manufacturing. However, since Trump was elected we have seen some big American companies move their production back to the US. Most recently Fiat Chrysler, the world’s eighth largest auto maker announced its plans to move production of its Ram heavy pickup trucks from Mexico to Michigan.

Moving production of the Ram, which is mainly sold in the US and Canada, means that Fiat Chrysler will not be paying the high import duties which are likely to apply if the NAFTA agreement is rolled back. Overall, we can see why Trump has been criticising the trading agreements with some countries around the world. But will he be able to change it during his presidency?

His current actions would suggest that the United States’ trade policies will be changing.