How US-CHINA Trade War have triggered a Currency War which will lead to the burst of USD Dominated D

The US - China trade war have finally erupted with implementations of 35B USD worth of Tariffs by both US and China on 6th July 2018. Markets have reacted positively after the implementation as the effects of the 25% tariffs by both nations are expected to have limited impact to corporate earnings or inflation given the small size of good affected by which not full impact would be felt as there could be alternative sourcing for imports which will offset tariff effects.

Trump have continued his threats for further 10% tariffs on 200B worth of goods against China, and on 20th July 2018, he mentioned a possible 505B worth of tariff for Chinese imports to the US, which would effectively be the entire value of 2017 imports.

In the past week, Trump has also been vocal against the Federal Reserve rate hiking policy and on various trading partners on the strong US Dollar which will have a direct impact on his intended tariffs.

We have warned on our Facebook Post on 21st June 2018 that the pace of EM Asia and CNY outflows is likely to increase, and we have seen in the past month a 4.5% fall in the CNY against the Dollar.

The Shanghai Composite Index have fallen 15% since May 2018, while the Singapore Straits Times Index is down 14% since the peak on May 2018 when we have warned readers of increasing pace of outflows given the stronger dollar.

The 4% fall in the CNY in the past month without any meaning intervention from the PBOC have shown that the Chinese authorities are willing to allow the Chinese Currency to weaken, in part to soften the impact of the imposed tariffs while also as an easing effect to boost exports given the weaker domestic economy as recent Chinese economic data have shown.

Part of the willingness for such currency weakening is due to the strict capital controls which the Chinese authorities have imposed since the 2015 outflow crisis which allowed them to fix various loopholes on illegal transfers of CNY.

As Trump has noticed, his own Trade War policies against China and Europe has been countered with a Currency War by the PBOC and ECB to offset tariff measures, while the Federal Reserve continue on their hiking policy and balance sheet reduction policy (Quantitative Tightening) which lead to dollar inflows.

We believe this move for Currency Devaluation will trigger a burst in USD Dominated Debt within Asia and various Emerging Markets, as a devaluation in foreign currencies will only lead to a stronger dollar and further outflows. A stronger dollar would also meant higher repayment cost in both interest payment and full debt settlement in domestic currency terms. Given higher USD interest rates, we look at the possibility of lesser rollover of USD Debt which would be catalyst for further defaults in USD Debt as show in Markit Iboxx USD Asia Ex-Japan China Financials High Yield Index.

As below is a chart by the Bank of International Settlements showing the amount of US Dollar Dominated Debt issues, which we have seen strong growth in USD debt during the period of Federal Reserve QE from 2008 - 2017. Given the strong increase in USD Debt during period of low interest rates and weak USD, We are extremely worried on the amount of USD Debt defaults we can expect when the Dollar rise against EM currencies along side rising interest rates which will hurt corporate profits and likely lead to various downgrades and defaults.

We now have the perfect catalyst to the Emerging Markets Bust.

Trade War + Currency War = Higher corporate debt repayments in USD terms, while rising USD interest rates to further hurt refinancing cost would likely trigger massive downgrades and defaults on USD Debt in Middle East / Asia / China.

We thus expects this to further reinforce our call for continued outflows from China and whole of Asia, with Singapore to be largely affected by the outflows and on-going trade war.

We hereby issue a 6 months forecast to the USD/CNY & USD/SGD rates.

Current Rates USD/CNY : 6.77 USD/SGD : 1.362

6 Months Forecast USD/CNY : 7.20 USD/SGD : 1.42

We expect outflows to be inline with a declining stock market, with 6 months target for the Straits Times Index at 2900 from current levels of 3250. We seek for Hang Seng Index to trade at near 24000 levels on a 6 months time frame.

Having successfully warned readers not to chase the top on local banking sector stocks in April 2018, we maintain our previous call for continued pressure on Singapore Banks. DBS target for $23 by 30/9/18.

We have seem large effects with regards to trade terms in Singapore, while is a good reflection of global trade given Singapore ports capturing much of the global trade flow.

Non oil domestic exports (NODX) in Singapore increased 1.1 percent year-on-year in June 2018, after a 15.5 percent rise in May and far below market consensus of a 7.6 percent gain. It is the lowest reading since March 2018.

US indices have remained very stable in recent months, while we have noted that market breadth have declined the the past week which could lead to a bearish turn in the markets.

We remain broadly negative global equities, while the energy and industrial metals market have confirmed our assessment of slowly global growth momentum with falling prices in the past 2 weeks.

Good Luck Trading!

The Bad Bear