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China applies its own maximum pressure policy on Pyongyang

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As the U.S.-North Korea summit looms, President Donald Trump‘s maximum pressure policy on North Korea may be working — thanks to China.

Beijing appears to have gone well beyond U.N. sanctions on its unruly neighbor, reducing its total imports from North Korea in the first two months this year by 78.5 and 86.1 percent in value — a decline that began in late 2017, according to the latest trade data from China. Its exports to the North also dropped by 33 percent to 34 percent both months.

The figures suggest that instead of being sidelined while North Korean leader Kim Jong Un made his surprising diplomatic overtures to Seoul and Washington, China’s sustained game of hardball on trade with Pyongyang going back at least five months may have been the decisive factor in forcing Kim’s hand.

Trade with China is absolutely crucial to North Korea’s survival.

It accounts for the largest share of the North’s dealings with the outside world and provides a lifeline to many of the necessities Pyongyang relies on to keep its nation fed and its economy from breaking down. Estimates vary, but it is believed that roughly half of all transactions in the North Korean economy are made in foreign currencies, with the Chinese yuan being the most common.

That gives Beijing tremendous leverage, though for political and national security reasons it has generally been reluctant to exert too much pressure on Pyongyang.

That reluctance is clearly wearing thin.

The statistics need to be taken with a dose of caution. Neither country is known for its commitment to transparency. Even so, more specific data reveal an even tougher, targeted crackdown, according to Alex Wolf, a senior emerging markets economist with Aberdeen Standard Investments:

— China’s exports of refined petroleum have collapsed over the past five months — to an annual rate of less than 4 percent of what it exported last year. With the pace on a downward trend, he believes, total exports could actually fall further.

— North Korean steel imports from China have also collapsed in 2018, and the same goes for cars. Wolf notes that it’s unclear if China is blocking such exports or North Korea simply can’t afford them. But either one, he wrote in a recent report for the company, would be a clear signal the North’s economy is “under a great deal of stress.”

“While China’s role over the past few months has often been overlooked or little understood, it appears a strategy could be emerging: China wants to play a central role in ‘resolving’ this crisis, but wants to do it on its own terms,” he wrote. “It’s increasingly clear that Chinese pressure is a driving force and China will play a central role in any future talks.”

Kim announced in his New Year’s address he would reach out to the South to ease tensions on the Korean Peninsula. He then agreed to hold a summit with South Korean President Moon Jae-in on April 27 and with Trump after that. But to the surprise of many, Kim suddenly showed up in Beijing first for a summit with President Xi Jinping last month, underscoring the continued primacy of China in North Korea’s foreign relationships.

Lu Chao, director of the Border Study Institute at the Liaoning Academy of Social Sciences, noted that China accounts for almost 80 percent of the North’s total trade, meaning the onus for implementing U.N. sanctions has been mainly borne by Beijing, whose enforcement has created “huge pressure on North Korea.”

“There is no doubt China is doing more than ever when it comes to sanctions,” he said, adding restrictions on sales of textile and seafood products to North Korea imposed by China last autumn “have dealt a huge blow to the country.”

“China has played a very important role in promoting the current change of the situation,” he said.

The decrease in trade isn’t just about politics.

China’s economy is also dealing with overproduction in many industries and its demand for North Korean imports is low. Efforts at joint development projects have languished and difficulties suffered by Chinese firms in North Korea — especially problems receiving payment — have soured enthusiasm for cross-border trade.

But the deficit presents an obvious dilemma for the Kim regime: the more it depletes its foreign reserves by buying in excess of what it sells, the less money it has to buy anything at all. Normally, that would lead to inflation — and even hyperinflation — as imported necessities become scarcer and people who can afford to do so dump their holdings in the local currency to buy safer U.S. dollars or Chinese yuan.

Georgetown University economist William Brown said he believes the North’s current account deficit has risen dramatically since the strengthening last November of sanctions on North Korean exports by China, which he said are by now “certainly biting.”

“Why is Kim venturing his offer now? My impression is he is feeling very strong pressure from China’s virtual embargo on North Korea’s exports, and what he must see as a gradual ratcheting down of needed imports, even petroleum,” Brown wrote in a recent blog post. “This is an enormous economic hit of a sort the country has never had to deal with on this scale.”

Brown believes an important indicator of the North’s economic health will be movement of the unofficial but widely used exchange rate for the North Korean currency, which has been surprisingly stable at around 8,000 to the U.S. dollar for years but should now be under intense inflationary pressure.

“China is giving us the chance, and (we should) use it cleverly to get what we want out of the nuclear program and systemic reform,” he added. “It’s not so impossible if you realize everyone, even young Kim, can benefit.”

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Huawei CFO Meng Wanzhou to be released after agreement with U.S. in fraud case

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Huawei chief financial officer Meng Wanzhou arrives at British Columbia Supreme Court with her security detail for the afternoon session of her extradition hearing, August 4, 2021 in Vancouver, Canada.

Don MacKinnon | AFP | Getty Images

The chief financial officer of Chinese tech firm Huawei will be released and allowed to return to China after reaching an agreement with the U.S. government on fraud charges, prosecutors said Friday in a Brooklyn federal court.

A U.S. district judge accepted the deferred prosecution agreement, which will last until Dec. 1, 2022. Under the deal, the executive, Meng Wanzhou, affirmed the accuracy of a statement of facts and agreed not to commit other crimes, or risk prosecution.

Meng, the daughter of Huawei’s founder, was arrested in Canada in December 2018. The U.S. sought to extradite her on bank and wire fraud charges, claiming she was misled a financial institution to violate American sanctions on Iran. The U.S. said Friday it plans to withdraw its extradition request.

Meng pleaded not guilty to the charges on Friday. As part of the agreement, however, she took “responsibility for her principal role in perpetrating a scheme to defraud a global financial institution,” acting U.S. Attorney for the Eastern District of New York Nicole Boeckmann said in a statement.

According to Boeckmann, Meng admitted to making “multiple material misrepresentations” while CFO of Huawei about the company’s business in Iran, in conversations with the senior executive of a financial institution. The government claimed she did this to continue Huawei’s business relationship with the firm.

Boeckmann said the admission confirms the core allegations against Meng. Media reports have linked Hong Kong-based HSBC to the case, though the bank has previously said the DOJ has confirmed it is not under investigation in the case.

A Huawei spokesperson declined to comment.

A lawyer representing Meng said he was “pleased” with the agreement.

“She has not pleaded guilty and we fully expect the indictment will be dismissed with prejudice after fourteen months,” attorney William W. Taylor III said. “Now, she will be free to return home to be with her family.”

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Stocks face another turbulent week as the third quarter winds down

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A trader works inside a post on the floor of the New York Stock Exchange (NYSE), August 27, 2021.

Brendan McDermid | Reuters

After recent turbulence, markets are likely to close out the final week of the third quarter with another bout of volatility.

Stocks in the past week traded with big extremes. First, fears of financial contagion coming from Chinese developer Evergrande sent stocks skidding Monday. Losses were reversed by Thursday, when the market ripped higher. The S&P 500 and the Dow Jones Industrial Average were positive for the week, while the Nasdaq eked out a gain.

“I think this market turmoil has yet to conclude,” said Sam Stovall, CFRA chief investment strategist. “Certainly September is doing what it normally does. It frustrates investors.”

The three major stock indices were also higher for the third quarter so far.

Strategists say how the market trades in the coming week may be the most important development, after the wild swings in stocks and also the rapid rise in Treasury yields late in the week. The 10-year, at about 1.3% on Wednesday shot up to nearly 1.46% by Friday.

The S&P 500 was down about 1.4% for the month of September so far. “We are getting long in the tooth. The technical indicators are pointing to distribution. We’re seeing prices roll over, breadth roll over. You’re seeing sentiment roll over,” said Stovall. He said the breadth needs to improve, and many stocks are trading below their 200-day moving average.

October is a ‘seismic’ month

“I think October will be true to itself, which is a very volatile month. October’s volatility is 36% higher than the average of the other 11 months of the year,” Stovall said. “Volatility is higher and you have a greater number of pullbacks, corrections and bear markets that either start or end in the month. It is a seismic month.”

Wealth management firm Wellington Shields warns that the fact many stocks have fallen below their 200-day moving average is a negative for the market. Just 59% of the stocks on the New York Stock Exchange remain above it, or in an uptrend, according to the firm. The 200-day moving average is the average of the last 200 closing prices of a stock or index, and it’s viewed as a momentum indicator.

“The rule is that when this 200-day number drops from above 80% to below 60%, it usually goes below 30%. Forgetting that, the real point is that while most stocks may be advancing, barely more than half are advancing enough to be in uptrends. With the market just a few percent below its highs, this is a concern,” Wellington said in a note.

What to watch

In the coming week, there are a few key economic reports including including durable goods Monday and ISM manufacturing Friday. There is also personal consumption expenditure data Friday, which the Federal Reserve monitors for its inflation index.

The Federal Reserve will remain a big focus in the week ahead. There will be a host of Fed speakers, including Fed Chairman Jerome Powell who testifies twice before Congress on the pandemic and the policy response to it. Treasury Secretary Janet Yellen will join him for the hearings Tuesday and Thursday. Powell also appears on a European Central Bank panel with other central bank leaders Wednesday.

Investors will also be watching Congress in the week ahead as it attempts to pass a funding plan in time to avert a government shutdown Oct. 1. The debt ceiling is expected to be part of that debate, but strategists do not expect it to be resolved at the same time. They say this could hang over the markets for several weeks before Congress raises the debt ceiling.

Fed speakers are not expected to provide any new information, but they could fine tune their message after the central bank signaled this past Wednesday that it expects to begin paring down its $120 billion in in monthly bond purchases soon. The Fed also released a new forecast for interest rates, which revealed that half of the 18 Fed officials expect to raise interest rates next year.

“I think what the Fed’s achieved so far is a taper without a tantrum,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

“I think a lot of people who invest in the market have a sense they are skating on thin ice, and any crack could be a big one… people are highly sensitive and nervous because they know valuations are stretched,” he said. “That means we should expect these episodic jumps in volatility.”

Chandler said the market will need to digest the recent moves, particularly the move higher in Treasury yields.

“What we’ve got to wait for now is finding this new equilibrium. What kind of market should we expect? Trending? Or do we try to find a range?” he said. “I think we find a range. We need some hurdles to pass.” Chandler said one hurdle is the September jobs report on Oct. 8.

The Fed is expected to taper its $120 billion monthly bond purchases unless there is shockingly weak employment data. “That is the only thing that stands in the way of Fed tapering,” Chandler said.

Wells Fargo’s Michael Schumacher, said the quarter end could be quiet in terms of big funds rebalancing. “The equity market bounced around. It’s up on the quarter. That wasn’t much when you compare it to the bond performance,” he said.

The 10-year yield made an unusually volatile round trip move in the third quarter. It was 1.47% on June 30, and it was as high as 1.46% Friday. In between it dipped to 1.12% in early August. Schumacher said the bond market could be quieter ahead of the quarter end, and the 10-year yield could then resume its move higher.

Some strategists watch the 10-year Treasury yield as a leading indicator for stocks. It is also linked to moves in technology and other high-growth stocks.

What’s next

Katie Stockton, founder of Fairlead Strategies, said high growth and tech are susceptible now to moves in the 10-year Treasury yield. She said the technology sector is the most overbought in relative terms, when comparing the sector to the S&P 500. The S&P tech sector was up about 0.8% for the week, and it was up nearly 6% for the quarter.

“We would consider reducing exposure to growthy ETFs like ARKK and would be respectful of any breakdowns,” said Stockton.

Investors have been fixated on the S&P 500’s 50-day moving average. For the first time this year, the index broke below and closed under the average for multiple sessions this past week. By Thursday, it regained the 50-day and finished above it. The broad-market index closed above the 50-day moving average on Friday.

The 50-day is literally the average of the last 50 closing prices, and it is viewed as an important momentum indicator, just as the 200-day moving average is. A break above could signal a positive move, and a break below it could mean more downside.

Stockton said the relief rally in the S&P 500 could resume in the coming week. “But we think it will fade by the end of the week given the downturns in our intermediate-term indicators. We expect the SPX to make a lower high,” she wrote in a note.

She expects the 10-year Treasury yield could continue higher. “Momentum appears to be shifting to the upside and next resistance is near 1.53%. The breakout should benefit the financial sector, which saw significant outperformance [Thursday],” Stockton noted.

Week ahead calendar

Monday

Earnings: Aurora Cannabis

8:00 a.m. Chicago Fed President Charles Evans

8:30 a.m. Durable goods

12:50 p.m. Fed Governor Lael Brainard

Tuesday

Earnings: IHS Markit, Micron, Cal-Maine Foods, Thor Industries, United Natural Foods, FactSet

8:30 a.m. Advance economic indicators

9:00 a.m. Chicago Fed’s Evans

9:00 a.m. S&P Case-Shiller home prices

9:00 a.m. FHFA home prices

10:00 a.m. Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen before Senate Banking, Housing and Urban Affairs Committee on pandemic response

10:00 a.m. Consumer confidence

1:40 p.m. Fed Governor Michelle Bowman

3:00 p.m. Atlanta Fed President Raphael Bostic

7:00 p.m. St. Louis Fed President James Bullard

Wednesday

Earnings: Jabil, Cintas, Herman Miller

10:00 a.m. Pending home sales

11:45 a.m. Fed Chairman Powell on European Central Bank panel

2:00 p.m. Atlanta Fed’s Bostic

Thursday

Earnings: Jefferies Financial, CarMax, Bed Bath & Beyond, Paychex

8:30 a.m. Initial jobless claims

8:30 a.m. Real GDP Q2

9:45 a.m. Chicago PMI

10:00 a.m. Fed Chairman Powell and Treasury Secretary Yellen before House Financial Services Committee

11:00 p.m. Atlanta Fed’s Bostic

11:30 p.m. Philadelphia Fed President Patrick Harker

12:05 p.m. St. Louis Fed’s Bullard

12:30 p.m. Chicago Fed’s Evans

Friday

Monthly vehicle sales

8:30 a.m. Personal income and spending

10:00 a.m. Manufacturing PMI

10:00 a.m. ISM manufacturing

10:00 a.m. Consumer sentiment

10:00 a.m. Construction spending

11:00 a.m. Philadelphia Fed’s Harker

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Bitcoin and ether slide as China intensifies crackdown on cryptocurrencies

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Bitcoin and ether tumbled Friday, with traders rattled by tough talk out of China.

The price of bitcoin fell nearly 6% to $42,124.73, according to Coin Metrics data. Ether, the second-largest digital currency, dropped 8% to $2,894.36.

It comes after the People’s Bank of China said in a Q&A that all crypto-related activities are illegal. Services offering trading, order matching or derivatives for virtual currencies are strictly prohibited, the PBOC said, while overseas exchanges are also illegal.

Beijing has cracked down sharply on crypto this year. The Chinese government moved to stamp out digital currency mining, the energy-intensive operation that validates transactions and produces new coins. That led to sharp slump in bitcoin’s processing power as miners took their equipment offline.

The PBOC banned banks and non-bank payment institutions like Alibaba affiliate Ant Group from providing services related to virtual currency. In July, authorities told a Beijing-based software company to shut down over its involvement with crypto trading.

Constantine Tsavliris, head of research at crypto data site CryptoCompare, said the harsh rhetoric was likely to result in a “short-term sell-off as negative news presses investors to take a conservative approach.”

“The recent news by China serves as an extension of previous announcements in May regarding a crackdown on cryptocurrency mining and bans on financial and payment institutions from crypto-related services,” Tsavliris told CNBC.

“As a result of the bans, we previously saw a short-term sell-off and a shift in mining away from China, followed by a swift recovery throughout July and August,” added.

Vijay Ayyar, head of Asia Pacific at digital currency exchange Luno, said that while China’s position on crypto was not new, it was enough to pressure the market. Investors had already been unnerved by the U.S. Securities and Exchange Commission taking a tougher line on cryptocurrencies lately, he added.

Coinbase, America’s largest crypto exchange, recently got into a public spat with the SEC. Regulators threatened to sue the company over a product called Lend that would have allowed users to earn interest on their holdings. Coinbase recently decided to drop Lend.

“The Chinese regulators have always been extreme in their views and these comments are not new,” Ayyar told CNBC. “They have said these things many times in the past. But the reaction is interesting purely because we are anyway in a slightly nervous environment for crypto with the recent SEC comments and overall macro environment with the Evergrande news. So any comments of this nature will cause a sell off in risky assets.”

Global markets have been roiled lately by fears of a potential collapse for embattled Chinese property developer Evergrande.

“Overall, we’ve seen this play out many times in the past, with such dips being inorganic and bought up quite quickly especially in environments where crypto is in a bull market cycle,” Ayyar said, referring to China’s crackdown. “Price action wise, as long as we don’t drop below $38,000 on a high time frame basis, we are still in bullish territory.”

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