Markets Look For Direction, While Nord Stream II And SMIC Are In The Cross-Hairs

The US effort to limit China's ability to secure and develop its semiconductor business may be on the verge of a new step. Reports suggest it is considering blacklisting SMIC (Semiconductor Manufacturing International Corporation), China's largest semiconductor foundry. Ostensibly, the argument is that it has ties to the Chinese military. It secures about 50% of its fabrication equipment from US producers. Its shares fell, as did the shares of other Chinese semiconductor companies. Such action would be seen as an escalation. It would likely encourage China to redouble its own efforts, expected to be in the next five-year plan, to become a world-class semiconductor producer and reinforce the drive to be self-sufficient (import substitution).    

For the third session, the dollar has held above JPY106.00. It has been confined to about a quarter of a yen range above JPY106.15. Nearby resistance is seen in the JPY106.40-JPY106.50 area, but the more important cap is near JPY107, where a $1.4 bln option expires tomorrow. The Australian dollar recovered from around $0.7220 to $0.7300 before the weekend and is consolidating today in the upper end of that range. Support emerged near $0.7270, and it has not traded above $0.7300 today. The PBOC set the dollar's reference rate at CNY6.8386, in line with the bank models. Recall that the yuan has appreciated against the dollar for the past six weeks. China's August reserves rose by $10.2 bln to $3.165 trillion, which was about half the increase expected in the Reuters survey. China's reserves rose by a little more than $42 bln in July, which we suspect was largely a function of valuation the non-dollar components appreciated sharply.   


Nord Stream II, a pipeline for Russian gas that bypasses Ukraine and goes below the Black Sea directly to Germany, has been controversial since Day 1. Despite some international pressure, which included sanctions by the US, Germany has pressed ahead. Reports suggest the pipeline is more than 90% completed. In light of the Novichok poisoning of Navalny, a vocal critic of Putin, Germany is threatening to end the project. Russia has a few days to respond. If it does, a large payment is due to Gazprom. The US position seemed nuanced. On the one hand, the US has been critical of the pipeline because it increases German dependence on Russia. On the other hand, the US wants to provide more gas to Europe, and US crude oil and unfinished fuel imports from Russia rose to 96.07 mln barrels in the first half of this year compared with 78.2 mln barrels in H1 19. While reluctant to impute a strategic view to Trump Administration's attitude toward Russia, one cannot help to recall that Nixon-Kissinger worked to open up relations with China, not because they thought it could become like the West. The China card played in the context of the Cold War with the Soviet Union. If there is a Cold War with China, like many, including ourselves, suggest, then the Russian card could be played to help check China. That said, Russia's behavior on the international stage is too odious, and the threat from China not sufficiently urgent to overcome this critical obstacle.

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Read more by Marc on his site Marc to Market.

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