We hope you had a happy Easter. The US financial markets didn’t. They were open yesterday. And it wasn’t a pretty sight.

The worst opening day for the second quarter since the Great Depression led the S&P 500 below its 200-day moving average – a key level traders watch. It had been a steady support level until now.

The Dow bounced off the same level, and the Nasdaq is still approaching it. The point is, we’re at a crossroads for the stockmarket. A few more down days and we’re in for a bear market. Thanks to lower lows and lower highs in the market’s usual gyrations, it’s looking likely.

Not to mention this simple crash predictor, which also tells you how far down stocks will go.

A bear market now is a horrific prospect for British investors. The FTSE finally made new highs before returning to the 1999 level in the latest correction.

Speaking of corrections, Easter’s political news was just as remarkable as the American stockmarket tumble.

In Europe, President Emmanuel Macron faces vast strikes. Rail services and Air France are expecting partial service. Energy and garbage collection companies are in trouble too. Not to mention the usual student protests. Ms Macron has disappeared from the news cycle.

In 2015, I was almost tear gassed in an Uber by the Seine. It was a nice reminder of the nature of European politics. In Australia, our protests look a little different. One recently featured white South African immigrants screaming their thanks to an Australian politician for suggesting humanitarian visas for South African farmers…

The EU’s politics got interesting too. The Dutch have taken on the British mantle of trying to keep the EU under control. With the EU’s key supporter Macron under fire in France, and Angela Merkel facing the Alternative für Deutschland (AfD) party as an opposition, the EU is starting to realise it’s in trouble. The 2019 EU elections are on the horizon. I wonder what a largely eurosceptic parliament would do?

In the US, the hilarious PR battle over Donald Trump continues. And the same man continues to win. The president’s approval ratings are rising and far a of Barack Obama’s equivalent at the same point in their two presidencies. This after the media interviewed a porn star about her affair with Trump, delivering the highest number of viewers for the programme in ten years.

But the biggest news wasn’t even in the news.

The beginning of the end of the US dollar

Over in China, something incredible happened. Not that many people noticed.

Right now, countries need US dollars to buy internationally traded commodities like oil. This creates a vast demand for dollars around the world. Which allows the US to run persistent trade deficits. It imports real stuff and exports printed money.

It was similar for the UK up to the 70s, when sterling was the currency used in trade. The problem is, when the rule about trading in US dollars ends, all those dollars around the world suddenly become a lot less useful. It’s not like the US exports much worth buying.

The so-called “reserve currency” can then crash as people sell out. We used to call it “the curse of the sterling balances” in Britain. A crash in demand for the dollar would mean the US is finally held to account for its persistent trade deficit by a tumbling currency.

It’s just as true to say that the US would be freed from the burden of having to run persistent trade deficits to finance the world’s trade flows. But that doesn’t sound as exciting. No likes a two-armed economist.

Here’s the crux: if a nation opts out of the US dollar system, it can expose all this.

The Chinese have announced their plans to pay for oil in yuan. No US dollars needed. The pilot plan might launch as early as this year.

The financial markets needed to make this work are up and running as of last week. Oil futures are already trading in yuan. With very high volume too. Already one oil supplier has signed up to deliver oil based on these new futures priced in yuan.

The Chinese certainly know the implications. The state-influenced Global Times explained it rather nicely:

Some have warned that the growing clout of China’s currency in international financial markets could gradually erode the primacy of the US dollar. But at the current stage, no knows for sure what impact China’s new benchmark will pose to the oil hegemony the dollar has held since the 1970s.

With few exceptions, any country wishing to purchase oil must first obtain US dollars, creating a significant demand for the currency in international financial markets. As a result, the petrodollar mechanism has played a critical role in generating global confidence in the greenback, which has benefited the US economy a great deal. 

The widespread pricing and trading of crude oil in the yuan, or the “petroyuan,” is likely to shake people’s confidence in the US dollar, and theoretically back up the value of China’s yuan in the global market place.

One clear objective for China’s regulators is to seek ways to internationalize its currency to boost its own economic prominence and reduce its longstanding reliance on the dollar.

As the world’s largest crude oil importer, China would naturally benefit from using its own currency over that of an economic rival and strategic competitor.

It’s always mystified me why anyone uses the US dollar in trade that has nothing to do with the US. The change seems to be logical.

The problem is the size of the disruption. A change in the oil market really is enough to cause problems for the US dollar’s value. And that could easily affect other markets also priced in dollars.

Oil’s annual trade value is about $14 trillion – close to China’s entire GDP. And China is the world’s largest importer of oil. That’s a vast demand for dollars which could drop out of the market dangerously quickly. The US dollar could tumble.

Of course, the Chinese won’t finish at oil. Other commodities will transition to trading in yuan too.

It’s a great example of how commodity markets and obscure trade rules can have enormous impacts on all of us. In the end, energy in its various forms is the building bloc of the economy far more than currencies or trade.

With that in mind, Southbank Investment Research is on the move with a major project you’ll want to be part of. Find out more here.

Until next time,

Nick Hubble
Capital & Conflict

Tim was RIGHT

On Monday 5th February, the Dow Jones recorded its biggest intraday fall in history, dropping almost 1,600 points.
The FTSE has taken a hit, too.
If you have ANY money in the stock market – either directly or through your pension – then I would urge you to read Tim Price’s letter immediately.
Capital at risk. A regulated product issued by Southbank Investment Research Ltd.