Recently, we discussed along with others, on how the tariff policy of this current White House might just be given another layer of intrigue by the little know Federal Court of International Trade. That complication found fruition yesterday as the court indeed ruled President Trump’s invocation of emergency laws giving him the power to impose tariffs as unlawful. The New York gathering of judges said it was the role of Congress to regulate commerce, and the International Emergency Economic Powers Act (IEEPA) does not empower him ability to sweep the world with tariffs. As with all court cases, it is not over yet as the Administration immediately lodged an appeal, but for now global trade is reprieved until such appeal is ruled on which might take some time. Legal opinion has that appeal courts and the ultimate arbiter the US Supreme Court are not in the business of overturning majority decisions, for this was a 3-0 one, therefore this process to find ultimate settlement is some way off. Markets are right to react with joy and put in spurt of risk asset buying, but Mr Trump is a dogged pursuant in court battles, his reach into the Supreme Court evident meaning this is not over yet.
Still markets are for the first time in an age left to frolic in legally unhindered investment pastures. All major bourses put in a rally of between 1-2% at time of press, the US Dollar Index takes back control of 100.00 with the greenback’s pairings of the Yen and Swiss Franc along with Gold suffering because they have been the destination of ‘flight’ money. Nvidia shares rose sharply after hours in support of investors’ mood as its Q1 performance beat expectation. Most markets will welcome the tariff ruling and probably a period of clarity, but how long it lasts will be the next bothersome issue and we all will watch much more for legal wrangles. Oil prices benefit as hopes of freer trade will bring greater demand, but there are some tighter parts of crude supply that give aid to bulls as well. The absence of sanctioned Venezuelan crude and the wildfires in Alberta, Canada threaten supply into the US which needs the heavier crudes, and allowing for supposition of an element of tightness is the API Crude draw of 4.2mb against an expectation of nigh on unchanged. In Africa, once again rumblings in Libya inspire reports of possible force majeure on oil assets in the near future.

China still pursues commodity freedom

China has long held anxiety on why it must rely on international benchmarks and exchanges on how its massive commodity exposure is priced and settled. Much of the inadequacy is self-inflicted because of an insistence on trading in CN Yuan and the restriction overseas companies feel when wishing to move capital around, which is a must given the complexities of international trading and hedging. This frustration saw expression from Chen Huaping, vice-chairman of the China Securities Regulatory Commission last December. According to China Daily, during the 19th China (Shenzhen) International Derivatives Forum, the vice-chair released information on how China will steadily include more futures and options that can be directly traded by overseas investors. Commodity futures and options accessible to qualified foreign investors (QFIs) will also be expanded in an orderly manner. In a time of tariffs and sanctions, opening China’s capital markets seems only sensible as any increase in international financial cooperation will not only add to economic inflows but give China a better standing within the global investment community.

During its forum the CSRC, was keen to enable exchanges such as the Shanghai Futures Exchange (SHFE) greater ability in posting its own settlement prices and allow provision for arbitrage between Chinese and international exchanges. The timing last December came with a sense of urgency, and it must be debated on whether the hurry was inspired by, rightly, a Donald Trump presidency and his incoming threat of Chinese tariffs. The CSRC almost culminated its new intention with a mission to introduce more autonomous and unilateral opening-up policies, further expand the network of high-standard free trade zones, and continue to create a market-oriented, law-based, world-class business environment. Appeasing language indeed when trying to attract notice when, as they prompted, making overtures to the World Bank, IMF and WTO among many. 

This, at first look wistfully ambitious wish list, found corpus yesterday as the SHFE, first revealed on Bloomberg, showcased its intention to put in place a currency vehicle that allows global investors to place foreign exchange as surety to Yuan-denominated commodities. The logic of domestic companies hedging or trading on domestic markets is self-explanatory, but without the expertise and liquidity provided by international banks and trading houses all previous attempts at grabbing futures business has seen very limited success. China has often expressed a need to build supply chain security, and a thriving internal derivative market where domestic exposure can be hedged or strategically traded will aid that cause. The other bonus, and made explicit in Bloomberg’s reporting, is with an affected fungibility, the Yuan gains much more exposure in terms of international recognition. Whether or not outsiders are convinced that interventions on an almost daily basis by the PBoC on how the Yuan settles versus the US Dollar will cease, only posterity will tell. Arguably, China should let the Yuan side effect occur by osmosis through commodity trading and other exchange-based derivatives rather than it being a backdoor way of challenging the superiority of the US Dollar.

The announcement by the SHFE should at present not have the likes of the Chicago Mercantile Exchange (CME) or International Commodity Exchange (ICE) quaking in their boots with regard to losing business to China and their domination of oil futures. Shanghai M1 futures volume had something of heyday when in December 2018 it scored 59.19% of ICE Brent M1 trades but has largely tailed off and rarely sees much more than an average of 25% of the world’s marker. The delivery processes and index-based pricing of two established stalwarts have seen practices honed for decades and levering liquidity from them would take great allurement indeed. But the SHFE, started in 1999, will relentlessly pursue an autonomy for Chinese commodity exposure until success is achieved. There can be no tangible influence on oil prices at present, but with an international community very much fed up with Donald ‘Tariff’ Trump, and the weaponization of US economic assets, any acceleration of a viable Chinese oil futures vehicle might just have a broader sympathetic reception and will bring more complexity to pricing. China must deliver on its loosening of interference in domestic pricing, but if it does, and the current antipathy toward Western dominance of markets continues, these developments are very much worthwhile in keeping abreast of.

Overnight Pricing