Monday, May 24, 2021

Capital Markets: "China Action on Commodities and Crypto Featured"

 From Marc to Market:

Overview: The US dollar is firmer in the European morning after starting out with a softer bias in Asia Pacific turnover. The dollar-bloc currencies, sterling, and the Swiss franc are heavy, but ranges are narrow, and consolidation seems to be the flavor of the day. Central and Eastern European currencies are faring best among emerging markets, but the JP Morgan Emerging Market Currency Index is little changed. Benchmark 10-year yields are also hovering around unchanged levels in Europe, and the US 10-year yield is flat at 1.62%. Equity markets are off to a better start. The MSCI Asia Pacific Index and Europe's Dow Jones Stoxx 600 are trying to extend the advance for the third consecutive session. At the same time, US futures point to recovery after the pre-weekend fall. China stepped up its warnings about the rise of commodity prices, and iron ore fell for the fourth consecutive session, for a cumulative 15% decline. Steel rebar futures price fell for the sixth session in the past eight for a nearly 19% decline in total. Copper prices are steady after falling more than 4% in the second half of last week. July WTI recovered before the weekend after falling nearly 7% in the previous three sessions and is up another 1.8% today to resurface above the 20-day moving average (~$64.55). Gold continues to trade within the range set in the middle of last week (~$1852-$1890).

Asia Pacific
Chinese officials escalated their threats against speculation and hoarding of commodities.
This is having a cooling-off effect. Top executives were summoned for a meeting with various government officials yesterday, according to press reports. Severe punishment was threatened for a range of activities, including "excessive" speculation, hoarding, and spreading fake news. Officials had warned about the rise of commodity prices before, but there has been little enforcement outside of some rule changes in the futures market. Recall that the April producer price index rose at its fastest level since 2018.

There was a suggestion last week by a PBOC official that suggested yuan appreciation could be used to counter the rise in commodity prices. However, subsequently, it appears that the original internet post has been removed, and other, more senior officials have downplayed it. The pledge to keep the yuan basically stable has been reiterated. Although many expect the PBOC to eventually relax its control over the yuan, this is not it. Separately, we note that PBOC Governor Zhou again has played down the digital yuan's challenge to the dollar. It seems that some in the US press have played this threat up more than the Chinese themselves.

Meanwhile, China reiterated its ban on financial institutions and payments companies from transacting with crypto and made clear that mining activity (solving terribly sophisticated computer problems that are rewarded with new tokens) was prohibited. China's ban on the use of crypto for financial transactions goes back to 2019 but did not seem to be enforced much. The mining activity in Mongolia, Sichuan, Xinjiang, and other mainland locations continued. China-based crypto exchange Huobi reportedly announced it reduced or suspended several of its service and product offerings. Ir also said it stopped its miner hosting services in mainland China in response to the recent crackdown on crypto in that country. That said, Huobi, the eighth largest mining pool in the world, did not stop its own operations but pulled back from its hosting services and the sale of mining machines. India wants to go further and ban possession of crypto. Several G10 central bankers have warned of the risks of crypto as an asset. However, rather than a ban, it seems more likely that the high-income countries will tighten the regulatory environment, spurred perhaps by the recent ransomware case, and more cynically, the desire for more revenue....