Central Banks

World War 3: Economic Attacks

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OIL

With the help of its Saudi ally, Washington is trying to drive down the price of oil by flooding an already weak market with crude. As the Russians and the Iranians are heavily dependent on oil exports, the assumption is that they will become easier to deal with.

John Kerry, the US secretary of state, allegedly struck a deal with King Abdullah in September 2014 under which the Saudis would sell crude at below the prevailing market price.

OPEC decided at its semi-annual meeting in Vienna on Friday not to cut production but to legitimize its overproduction. This has sent brent crude sharply lower closing at $40/barrel. With US crude ($37.60/barrel) now at it’s lowest level in 9 years!

Putin has responded with an attack on US reserve currency statusdumping US Treasuries, issuing Russian debt in YUAN creating a rival to TPP,

TPP

US corporations are closing down factories and leaving China in advance of the Trans Pacific Partnership (TPP) trade deal. Activity at China’s factories shrank at the fastest rate in at least three years in August, as domestic and export orders tumbled, increasing investors’ fears that the economy may be heading toward a hard landing.

The Chinese stock markets in the face of the record manufacturing slowdown have crashed over 40% since June.

In an attempt to combat the manufacturing slow down, China shockingly devalued it’s currency the YUAN by 4.7% over a 3 day period.

In order to stabilize the Yuan from expectations of further weakness and correspondingly a huge rise in China capital outflows, estimated by Bloomberg to be as much as $180 billion USD in August alone. The Peoples Bank of China (PBoC) has been defending the currency, by selling FX reserves and reducing its ownership of global fixed income assets. The PBoC’s actions are equivalent to an unwind of Quantitative Easing (QE), or in other words Quantitative Tightening (QT).

China’s persistent FX interventions in support of the yuan are costing the PBoC dearly in terms of reserves.

On Monday, we got the latest data from the PBoC which shows that during November, China’s reserves fell by around $87 billion. Stripping out valuation effects, the figure is probably closer to $40 billion (in other words, China probably sold some $40 billion in US paper during the month)

 

With the anticipation that China will liquidate as much as $1 trillion in US paper. China’s QT would need to be replaced by higher QE elsewhere, with the ECB, FED and BoJ being the most notable candidates.

With commodity prices crashing worldwide Emerging Market Countries will continue to face pressure on their currencies, you could see substantial FX drawdowns there too.

Now, between crude’s slump, the commodities bust, emerging market meltdown and China’s devaluation, it’s all falling apart at the same time.  The FED will need some form of Quantitative Easing (From somewhere) to soak up all of the US Treasuries dumped by China, Russia & the Emerging Market Countries.