Market update: Trump plays the good cop in Davos, sending US stocks and yields higher

29 Jan

by Mihály Tatár

 

Good Morning!

 

  • After the tough-talking Trump team (Mnuchin, Ross), the US President himself played the good cop in Davos, and softened the message (’the US is open for business’, but ’unfair trade practices won’t be tolerated anymore’). With the exception of Asian markets, this was well received by traders (SPX +1.18%, a new record high of course, meaning a 7.5% rise so far in 2018, Nasdaq +1.28%, DAX +0.31%, Nikkei +0.01%, Shanghai -1.35%), especially with the speculation that Trump will use his State of the Union speech to announce his large infrastructure programme. The latter has sent yields higher (US 5Y yield 2.49%, 10Y 2.69%, 12M Libor 2.25%), and supported commodities (Copper +3%, WTI 66.30, Brent 70.50 USD), while currencies did little hit by the conflicting messages of last week (EURUSD 1.2420 after Trump and Draghi, GBPUSD retreating to 1.41 after the underwhelming British GDP figures- 1.5% Y/Y these days doesn’t look good, Theresa). Speaking of conflicting messages, ECB council member and head of the Dutch Central Bank Klaus Knot found it necessary to talk about the easing programme ’having done what could realistically be expected of it’, and that it has to end ’as soon as possible’ – not helping Draghi’s efforts to relax rate hike expectations. Further eroding the image of crypto currencies, the largest crypto exchange of Japan, Coincheck Inc., has been hacked and 500 million USD worth of digital money was stolen. (I guess such accidents can happen if the CEO himself is a 27-years-old and cares little about security protocols.)

 

  • Sensing the growing inflation pressure and the markets’ distrust, Pakistan’s central bank unexpectedly increased its benchmark rate (from 5.75% to 6%), for the first time in four years. While the rate increase itself will probably do little about inflation (the Rupee declined 5% against the Dollar since early December and Pakistan’s current account deficit increased by 60% in six months), investors were happy (Karachi Exchange +1%, MCB Bank +4%, United Bank +3%, Habib Bank +5%) as they interpreted the move as a signal that Islamabad will go for another IMF bailout package after the elections.

 

  • Showing the underreported, but drastic change in thinking about international politics and economic security, the US has just abandoned its decades-long tradition of auctioning licenses to telecommunication companies to build their own networks, and instead, wants to build a single, secure 5G network, mainly to minimalize cybersecurity threat from China. (As discussed here several times, Huawei’s rise is by now ringing the alarm bells from Washington to Brussels. It is not hard to forecast that in the coming years, the geopolitical security angle of business investments will be more closely watched than it has ever been since the Cold War.)

 

Have a nice day,

Mihály

 

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