China makes economic history today by introducing a new type of oil contract, which came on the market at a price of ¥430.
Yes, that's right, oil from China will be priced in Chinese currency.
Since the early 1970s, all the major oil contracts have been priced in US Dollars, which is also known as the petrodollar and helped the USD become the world's global reserve currency.
By valuing the contracts in Renminbi, China hopes to accomplish two things.
One, to exert a greater control over the price of oil. China has recently overtaken the USA as the largest importer of crude so having oil priced in their local currency will be very helpful.
Two, to challenge the notion that all commodities should be priced in USD. This is part of a long-term strategy to promote the Renminbi as an alternative to the Buck on the global stage.
Of course, neither of the above will happen very quickly. China has rather harsh conditions on the new contracts to prevent them from turning into a speculative bubble so volumes could remain rather light for the first few years.
However, this is a rather large victory today as they've been trying to implement such contracts since 1993. With global investors buzzing about Trump's trade wars and the US Dollar sinking, it seems they have found the perfect timing to get this going.
Today's Highlights
Buying the Dip
Oil Divergence
When will Ripple Moon?
Please note: All data, figures & graphs are valid as of March 26th. All trading carries risk. Only risk capital you can afford to lose.
Traditional Markets
Talk of a trade war between the two largest economies in the world has brought stocks to their knees at the end of last week.
So the hope is that even though Trump is talking tough, we may yet come out of this relatively unscathed. Indeed, the retaliation from China against the steel and aluminum tariffs was seen as rather light-handed. Still to come is the retaliation for the additional $60 Billion worth of tariffs that are likely to be imposed on China in the next two weeks.
Donald Trump has given the US's closest allies (Canada, Mexico, Australia, Argentina, Brazil, South Korea, and Europe) a temporary extension on the Steel and Aluminum tariffs. So we can expect further bargaining and posturing leading up to the new deadline on May 1st.
According to Nobel prize-winning economist Rober Shiller, the longer this plays out, the worse the effects.
According to Shiller, it's the uncertainty of the future that causes the most damage. Not knowing what the landscape will look like over the next few years will cause many businesses to adopt a wait and see attitude towards global trade, which is very bad for business.
Stock index's this morning are rushing in to buy the dip. After the extreme lows of late Friday bargain hunters are out looking for a bounce.
We might also see some of the focus shifting from geopolitics to central banks as no less than three Fed members are scheduled to speak this evening.
Oil's Strained Relationship
The relationship between crude oil and the US stock market was as strong as ever in the second half of 2017. However, since the recent volatility spouts in mid-February, it seems that this relationship is under extreme pressure.
Here we can see WTI crude oil against the S&P 500 since July. Notice how they've been traveling together for most of the time. But since the beginning of March are actually going in opposite directions.
For a deeper dive, we can look at the ETF that tracks energy-related stocks, which is known on the eToro platform as XLE (NYSE:XLE).
By comparing oil and energy stocks, we can see that this rift is actually a while in the making. While oil has been getting rather excited by recent OPEC announcements, XLE simply has not shared the enthusiasm.
Both of them did fall in the "bond spike" rout of early February but since then it looks like the two assets are sleeping in separate bedrooms.
When Moon Sir?
Of all the cryptocurrencies in the world, none has captured our imagination as much as Ripple.
At present time, more than 74% of active investors in eToro are holding Ripple's XRP tokens in their portfolio.
So, now that we know what XRP is and what it is not, we can take a look at the price action, which has been simply unprecedented, even for a cryptocurrency, coming from fractions of a penny in early 2017 to a high of $3.50 at the peak on January 4th.
For the moment, XRP is testing a strong support level of 50 cents per coin. For a good look at the chart, we should probably look at the logarithmic scale graph, which gives us a better perspective of percentage gain over time.
As with everything crypto, Ripple's payment channels are still largely under construction. We know that XRP tokens are now being tested by the remittance giants Western Union and by Moneygram. If either of them ends up adopting XRP for international settlements it could create buying pressure on the tokens.
At the same time, Ripple is growing as a company with several banks in Japan now building an app based on Ripple's technology for instant payments.
At this point, it's easy to imagine a world in which XRP on some level is thought of as the oil that powers global financial transactions. Of course, it's also easy to imagine that it won't.
So, though it is particularly risky, we do feel that the trend is impossible to ignore and having this asset as part of a well-diversified portfolio is well justified. Of course, the key is to only use high-risk assets as a small part of your total holdings.
Wishing you an amazing week ahead!
eToro, Senior Market Analyst
Disclosure: This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results. All trading carries risk. Only risk capital you're prepared to lose.