The weak Euro and the last leg of a very strong US Dollar.
Multipolar World→ New Global Value Network → Weak Euro→ Redefinition of Energy Demand→ Low Oil Prices.
The Euro bulls are again betting for a strong Euro. The rationale being the potential for a cut in US interest rates, as well as the possibility for poor economic for the US. However, we’re thinking that something else bigger is at play here. The major ongoing geopolitical competition outweighs the impact of the short term monetary policy adjustments.
Our thesis is that we are living in a period comparable to 1983-1985, when Reagan intensified the competition between the US and the Soviet Union.
The global competition for geopolitical power will redefine the global value chain network. The diagram below from the Bank of International Settlements shows that Germany is a major node, greatly impacted by China.
Source: Bank of International Settlements.
Equity Signal
So the disruption on the global value chain must be expressed in bonds, equity Prices and the FX market.
If we compare the German index etf (EWG) to that of the S&P 500 etf (SPY) and against the Euro, it suggests that the EURO is currently too strong and could reach the 1.05 level.
Source: Stockcharts.
Bond signal
Source: St Louis Federal Reserve.
If we compare the 10-year US bond against 10 year German bonds (blue), we see a spread divergence similar to that of the early 1980s. The trade weighted US dollar (red) spiked in 1985.
Energy Signal
Energy markets are undergoing a massive transformation and it is not from the supply side, but the demand side, where gas and non-fossil fuels are going to be the winners. In the 80s there was also an important change when gas and nuclear energy began to grow.
Source: US energy information EIA.
The 1980s were also a time when implementing tanker wars was a common strategy in the warfare between Iraq and Iran. This geopolitical tension was still not enough to stop the crash of oil prices in 1985.
The trade wars are redefining the global value structure and the architecture of energy demand.
Get ready for a multipolar world and the rise of localism!
CCTV interview about trade wars. @GMacrowise @macrowise.
This newsletter is a very light version of our research. It is not advice or an investment recommendation. We have skin in the game, so it is highly probable our ideas have some confirmation biases.
Sao Paulo, June 14 2019
Guillermo Valencia A
Head of Global Macro Research