Monday's Markets Update (August 7, 2023)

08 Aug 2023 by rate3

On Monday, consumer credit expanded unexpectedly, with the NASDAQ being lethargically volatile as Apple and Tesla retreated. As traders await the Thursday's CPI report, BTC made a brief plunge under 29K again, confirming its bearish trend. Other news: Hong Kong's SFC warned crypto-investors, Bowman (Atlanta Fed) anticipated additional rate increases, and Carbon Credits are down on slowed manufacturing in the EU.

Details:

Total consumer credit in the US increased sharply in June, with non-revolving credit, such as auto and student loans, leading the way (+6%). Revolving credit, such as credit cards, fell slightly (-0.6%).

Comment:

Why did consumer non-revolving credit jump so drastically in June 2023, while revolving credit dropped?

There are a few possible explanations for this trend. One possibility is that consumers are making big purchases now, before prices go up even more. Inflation is high, and consumers are expecting prices to continue to rise. They may be taking out loans to finance large purchases, such as cars and homes, in order to lock in a lower price.

However, this spike in non-revolving credit also looks seasonal. The average quarterly growth rate for non-revolving credit in Q1 and Q2 is around 3%. It is more likely that consumers are taking out student loans to pay for college, which typically starts in September.

On the other hand, the sharp drop in revolving credit (from 8.1% in May and 13.7% in April) may be a sign that consumer confidence in the economy is starting to become shaky. This is not a good sign for the economy as a whole, as consumer credit is one of its main growth drivers. For reference, the total accumulated consumer credit in the economy is USD 4.9 trillion and it has increased almost 25% in 5 year.

Crypto

Hong Kong's SFC warned investors about unlicensed crypto platforms, hinting that only HashKey and OSL Exchange are licensed. The city is tightening regulations as it seeks to become a crypto hub.

Macroeconomics

Russia: The yield on the Russian 10-year OFZ soared to 11.6% in August, the highest since the invasion of Ukraine, amid a widening budget deficit and a hawkish central bank. The government is heavily dependent on bond issuance to finance its deficit, and the central bank is raising interest rates to combat inflation.

Comment:

The national treasury reported a financial shortfall of RUB 2.6 trillion in the first half of the year, a record high for the period. This was due to the ongoing war, which continued to drain resources, and the state's essential revenue streams were harmed by low energy prices.

While higher oil prices temporarily improved the budget's revenue stream, Urals contracts are now trading above the EU's price cap, increasing geopolitical risk in the market.
As a result, Moscow is heavily reliant on bond issuance to finance its financial shortfall, which is driving up yields.
In the meantime, the Russian Central Bank raised its key interest rate by 100 basis points to 8.5 percent, signaling that the risks of inflation increasing have significantly increased since the start of the third quarter, making more interest rate hikes in upcoming meetings likely.
Carbon Credits: The price of carbon permits in the European Union fell to EURO 87 per tonne, the lowest in two months, as investors anticipate less demand for permits due to a weak manufacturing sector. The decline in German industrial production in July highlights the impact that higher interest rates are having on European manufacturing.

Comment:

Carbon permits work by setting a cap on the total amount of CO2 or GHGs that can be emitted. Companies that emit more than their allotted amount of CO2 or GHGs must either reduce their emissions or purchase carbon permits from companies that have emitted less than their allotted amount. This creates a market for carbon permits, which drives down the cost of reducing emissions.

The size of the carbon permit market is still relatively small, but it is growing rapidly. In 2020, the global carbon permit market was worth an estimated $85 billion. This is expected to grow to $250 billion by 2030.

The major markets for carbon permits in Europe, Asia, and the Americas are:

Europe: The EU ETS is the largest carbon permit market in the world. It covers about 45% of the EU's greenhouse gas emissions.
Asia: China has the world's second largest carbon permit market. It covers about 20% of China's greenhouse gas emissions.
Americas: The Regional Greenhouse Gas Initiative (RGGI) is the largest carbon permit market in the Americas. It covers about 10% of the electricity sector in the northeastern United States.
The growing carbon permits market can be viewed as a global bureaucracy expansion index. While carbon permits are intended to use market forces to help the environment, they cannot exist without a constantly expanding government bureaucracy. While they may fluctuate and decline as the global recession hits markets, the overall trend of world bureaucratization is only upwards.

This is because carbon permits are a form of government regulation. They are created by governments and enforced by governments. In order for carbon permits to work, governments must be able to track and monitor emissions, issue permits, and enforce compliance. This requires a large and violent bureaucracy.

Currencies

Mexico: The Mexican peso has fallen from its near-eight-year high as investors await inflation data and monetary policy decisions. The peso is still one of the top-performing currencies year-to-date, thanks to high interest rates, political stability, and "nearshoring".

The Mexican peso has experienced a rapid devaluation (from 10 to 24 Pesos / USD) since the 1990s due to a number of factors, including:

The Mexican financial crisis of 1994: The Mexican financial crisis of 1994 was a major economic crisis that caused the peso to lose over half of its value against the US dollar. The crisis was caused by a number of factors, including high government debt, low foreign reserves, and a large trade deficit.
The 2008 financial crisis: The 2008 financial crisis also had a significant impact on the Mexican peso. The crisis caused a global economic slowdown, which led to decreased demand for Mexican exports. This, in turn, led to a decrease in the value of the peso.
The trade deficit: Mexico has a large trade deficit, which means that it imports more goods and services than it exports. This puts a strain on the peso, as it makes it more difficult for Mexico to earn foreign currency.
Political instability: Mexico has experienced a number of political crises in recent years, which have also contributed to the devaluation of the peso. These crises have led to uncertainty about the future of the Mexican economy, which has made investors less willing to invest in Mexico.
The war on drugs: The war on drugs has also had a negative impact on the Mexican economy. The war has led to violence and instability in many parts of the country, which has made it difficult for businesses to operate. This, in turn, has led to a decrease in economic growth, which has put pressure on the peso.
The devaluation of the peso has had a number of negative consequences for Mexico. It has made it more expensive for Mexicans to import goods and services, which has led to inflation. It has also made it more difficult for Mexican businesses to compete with foreign businesses. Additionally, the devaluation has eroded the value of savings and investments.

However, since 2020, the Mexican peso has reversed its course and started to appreciate against the US dollar. This is due to a number of factors, including:

Active reshoring: As the enclosure has led to supply chain disruptions, many companies have begun to reshore their manufacturing operations to Mexico. This has increased demand for the peso.
US Fed's policies: The US Federal Reserve's (Fed) decision to print trillions of dollars in quantitative easing (QE) has led to inflation in the United States. This has made the US dollar less attractive to investors, and has led to increased demand for the peso.
It remains to be seen whether the Mexican peso will continue to appreciate against the US dollar in the long term. However, the recent appreciation is a positive sign for the Mexican economy.

Commodities

Platinum: Prices have fallen in August to around $920 per ounce, hovering near a one-month low. This is due to ongoing concerns about demand for platinum, especially from China. New data showed that electric vehicle sales in China grew to over 30% of total sales in July, signaling a slowdown in the demand for platinum-heavy catalytic converters in combustion engines.

Comment

Although the percentage of new electric car sales in China has grown to over 30%, the percentage of electric vehicle production in the world is still very low, at around 6%. This means that the demand for platinum from the automotive sector is still relatively strong, despite the growth of electric vehicles.

The World Platinum Investment Council has projected a considerable deficit of 983,000 ounces for 2023, reaching the highest level seen since the 1970s. This suggests that there is still strong demand for platinum from both industrial and investment sources.

The growth of electric vehicles is a long-term trend, but it is still in its early stages. The demand for platinum from the automotive sector is likely to decline in the coming years, but it will not disappear entirely. Platinum is still used in a number of other applications, such as jewelry, electronics, and dentistry.

The percentage of electric vehicle production in the world is expected to grow to 20% by 2025 and 50% by 2030. However, even at these levels, the demand for platinum from the automotive sector will still be significant.

Overall, the outlook for platinum demand is mixed. The growth of electric vehicles will put downward pressure on prices in the short term. However, the long-term outlook remains positive due to the increasing demand for platinum from other sectors.

Platinum is a rare and valuable metal, and it is not easily replaced by other materials. This means that the demand for platinum is likely to remain strong in the long term.