Hey There Income Hunter,

 

Now that President Xi has gained complete control of the Chinese Communist Party, he is starting to flex his muscles.

 

The yuan had its best day yesterday since 2010 (+1.6%) and the CSI China Internet ETF (Ticker: KWEB) is up over 30% from its low.

 

There has also been discussion of reopening the economy, with Bloomberg reporting officials are working on plans to end Covid flight suspensions.

 

These developments may have some legs as German Chancellor Olaf Scholz, said China would make BioNTech’s Covid shots available to foreigners in the country, a potential first step toward wider offerings.

 

This has massive ramifications for the markets and yesterday’s movements may just be beginning.

 

Today, we’ll take a look at some big one-day moves and what they mean for traders and the Fed.

 

China Stocks Come to Life

 

There have been some big moves in Chinese stocks the past couple of days. Check out yesterday’s moves in a few of the big names … 

 

 

However!

 

I can’t get excited to trade China stocks.You just can’t trust their motives and, besides, the real juice in the reopening is to be long commodities.

 

Some major moves in industrial and precious metals today …

 

• Copper Index Fund ETF (CPER) up nearly 8% …
• Rare Earth Minerals ETF (REMX) up over 6%
• Cleveland-Cliffs Inc. (CLF) up 7% 
• iShares Silver Trust (SLV) up over 6%

 

Silver is the one I am most interested in because of how low inventories in the London vaults have gotten and how bearish sentiment has become. 

 

I don’t believe the bearish price action we have seen recently. I think it has been driven by US banks continuing to issue paper that isn’t fully backed by physical silver.

 

And I think the banks are likely to get run over as momentum builds. The $21.31 level in physical silver is the level to watch.

 

Once $21.31 clears, it confirms the trend changing over to bullish and then passing the 200 DMA clears the way for a move to $30. 

 

We need to see the technicals to match the bullish fundamental story for silver, which will be in huge demand in the years ahead for electric vehicles and solar panels.

 

Plus, silver is also in demand as a precious metal and with China seeking global power as an alternative to the dollar, it is possible it backs its digital yuan with precious metals.

 

Here is the long-term chart on physical silver:

 

 

China Reopening Not What Powell Needed

 

The downside of the China reopening is that all that pent-up demand could reinvigorate inflation at a time when the US financial system is showing signs of stress, especially in the bond market. 

 

Any boost to inflation will significantly hurt the Fed’s chances of getting inflation down, even with all the tightenings we have seen so far.

 

Just look at the speed and amount of tightening the Fed has already completed …

 

 

The speed at which the Fed hikes rates is incredible. However, the structural nature of this supply driven inflation makes it very difficult to stop by destroying demand. 

 

Higher rates only have the impact of slowing demand and the Fed only has so much room left before the weight of rate hikes crashes a sector of the system.

 

The other issue is will China now be selling their Treasury bonds to sell dollars and continue to strengthen the yuan? A weaker dollar also puts pressure on inflation in the US by raising the price consumers pay for imports. 

 

So, the net effect of China coming back on line is that it could light a new fire under inflation and risk negating the tighter financial conditions the Fed has worked hard to create. 

 

Bring it Home

 

The West’s competition may have an important player coming back from an injury … The G-4 – US, UK, Japan and EU – better raise its collective game.

 

For traders, a China comeback means more volatility, greater geopolitical risks and possibly a spurt of growth.

 

There are tremendous opportunities and I think Friday we may have seen a real boost for a bottoming of gold.

 

The bottom line is. inflation doesn’t need any help … but it may get it. This could ignite the oil and gas trade (USO and UNG) as well as put a bottom in gold and silver … 

 

I also like SPDR Select Sector Industrial ETF (Ticker: XLI). It holds defensive stocks, which is a sector that will see new money in the months ahead.

 

Stay tuned for more insight next week, when we have the midterm elections, heavy bond supply and the inflation report (CPI) on Thursday/

 

Until then …

 

Live and Trade With Passion My Friend,

Griff