2018 capital market opportunities

Daily Analysis - 01/01/2018

2017 had its high points but mostly it was a plethora of lows

2018


Besides the cryptocurrency adoption by early adopters, there was not a whole lot of new and exciting developments on the human societal and economic fronts this year. Most of our consciousness was filled with mindless ruminations by a less than scintillating US president, a Brexit “process” with the same game plan the Keystone Cops employed and the enchantingly riveting Kim testing nuclear capable weapons over Hokkaido. The US struck a calm but resolute stance by having two of its Arleigh Burke class destroyers rammed in the critical South China Sea.

The Brexit divorce carnival


The Brain Trust here at Research and Analysis Central sees a scenario where the chickens that were hatched during the previous forgettable year come home to roost with some disturbing yet potentially profitable possibilities. The EU’s first divorce proceeding will unravel messily. Despite the typically bureaucratic and regulation strapped Brusselsesque Article 50 of the Lisbon accord, which like so much of EU legislation and regulation, sounds well intended, but is so practically unwieldy that reality follows its, rather than the mandated, directions and outcomes, Brexit will result in battles and disputes over the bill (in the neighborhood of 50 billion Euros) likely toppling the hapless Ms. May. Remember this paragon of ideology and political philosophy was against the Brexit, fell into the PM’s job by virtue of the stunning reversal and departure of her predecessor and then promptly saw the light and became the beacon FOR the Brexit. Sensing an opportunity to snatch defeat from the jaws of victory she called a snap election only to lose most of her political capital. She ain’t long for this gig and she is likely to bring down the GBP even further that the 20% decline against the US dollar already experienced since the brilliant decision to leave the EU. And it is not likely to be good for the Euro either. As other nations see the course of the divorce proceedings, they too will consider the potential benefits of living free of the suffocating and expensive regulatory bonds of Brussels and Strasbourg. Our models indicate that chaos that ensues in the euro zone will have a strengthening effect on the US dollar.

 

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The Byzantine dance of the crude oil gnomes


The singular most important fundamental economic variable concerning the oil market has nothing to do with pipelines, supply competition between the shale wildcats or the sheiks or even the cartel itself. Rather it has all to do with demand. Namely that the absolute demand for crude oil around the world is falling, never to return to its glory days. Crude oil is used, nearly in its entirety, with some very important exceptions like chemical feedstock, fertilizer feedstock and plastics, as transport fuel. This phenomenon is waning as alternative transport power sources are rapidly replacing crude. As a result of this irreversible trend, the desire, nay the necessity, to “make hay while the sun shines” in other words to derive the maximum return on the waning asset that is crude, in the shortest amount of time, will very likely cause a very competitive drive to the bottom between the producers to capture as much of the market that remains as they possibly can before the bottom completely falls out and there remains only a fraction of the demand there is today for their product. We expect prices to breach $50/bbl in the first quarter of the year and continue a decline as cut throat competition for market share drives prices toward $20/bbl.

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The Chinese Yuan


Speaking of chickens coming home to roost, the Chinese economy is a ghost of a creature. A mere shadow of its former go-go self. The heady days where the economy grew at double digit rates year after year are behind us. That growth covered over enormous waste and inefficiency in the centrally controlled modern China. As the extent of corruption widens and the increasingly autocratic and power grabbing Xi regime ensconces itself more deeply than previous rulers, he harkens back to the Mao style of absolute dictatorship rather than the oligarchic style since the Deng days. Our analysts are of the opinion that the iron wave pattern of Chinese history wherein the nation, sprawling and difficult to rule goes from prosperity to corruption to chaos to local warlordism to regional stability to national prosperity only to repeat the cycle endlessly is well into the corruption phase. The Yuan is likely to weaken strongly as the extent of the banking and financial system weaknesses become more evident and widely understood.

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May the Czar be blessed and kept (far away from us)


The Russian Federation is standing on one leg and that is weakening too. The leg is energy and the clients for Russian energy are quickly finding the alternatives that Russian energy policy has wrought. Russia while ascribing to be European never quite got the hang of it. The dictatorial and autocratic manner with which Russia supplied gas and oil to the west was always risky because it forced the western customers to look for alternatives. Oil is hardly a problem as the world is awash in the stuff and can be had at deep discount, particularly from Russian sources who are well known to violate the OPEC production ceilings. It is in the gas sector that they are witnessing before their eyes the removal of the next to the last stilt supporting their economic system. The discovery of large commercial quantities of natural gas in the eastern Mediterranean have brought together the Egyptians the Israelis and the Cypriots together to pose a serious and credible challenge to the domination of Russian gas supplying the European market. Within the next five years this basin of energy will largely supplant the unreliable and politically sensitive Russian via Ukraine supply chain. Couple this with what will surely turn into some kind of quagmire in Syria and the Russian Federation and in particular its currency is expected to be worth considerably less than it is today.

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