Market update: Trump’s chief economic advisor resigns not helping the sentiment, North Korea is suddenly in a peaceful mood

7 Mar

by Mihály Tatár

 

Good Morning!

 

  • Optimism dominated on Tuesday (SPX +0.26%, Nasdaq +0.56%, DAX +0.19%), until the very moment the news came out that Gary Cohn, Trump’s chief economic advisor, resigns on the tariffs, rattling markets (SPX futures -1.26%, DAX futures -1%, Nikkei -0.67%, Hang Seng -0.80%, US 10Y yield back to 2.85%). In a sense, the reaction is understandable – as predicted here, Washington started to talk about a clampdown on Chinese investments and a range of anti-China tariffs from shoes to electronics just hours after the resignation – but personally I don’t find the news really negative or surprising: Cohn, a registered Democrat and an ex-Goldman Sachs banker, with his global-free-trade world view and ’you can’t do it’ attitude, was simply not compatible with this administration. Traders reflexively sold the Dollar against everything (EURUSD 1.2430, GBPUSD 1.39, USDPLN 3.37, USDHUF 252, with only the tariffs-hit Canadian Dollar weakening further), especially as tomorrow is ECB rate decision day and as we know at the press conference Draghi may literally say anything. (He will be probably questioned on why inflation is still going downwards in the Eurozone and what he thinks about the Italian election results – don’t hold your breath.) Oil prices slipped slightly  lower, as well (WTI 62, Brent 65.20 USD), on the trade war fears and on the EIA boosting global oil production estimates (it’s mostly the brutal US output growth, of course, forecasted to reach 11 million barrels a day in October). Traders noted somewhat amused that at the widely-followed CERAWeek energy conference in Houston, everyone talked the talk (OPEC: no need to worry about US production because demand is very strong and shale will fizzle out, most oil executives trashed electric cars), showing little appetite for much more serious geopolitical or demographic questions.

 

  • North Korea suddenly came forward and proposed talks on denuclearization (!) with the condition that the the regime’s survival is guaranteed. (Hey, this is something Bush and Obama couldn’t achieve for 16 years, where is the praise for ’unpredictable’, ’world-war-starting’ Trump?).  Of course, the media reaction was suddenly sceptical – ex-CIA officers called the signal ’buying time’ – but as discussed last year, I suspect Kim does feel the heat by now with US guns arriving steadily to the region since the hydrogen bomb test and China seeing North Korea as a very painful liability now.

 

  • While Brussels was busy preparing a tariff-retaliation plan (mostly T-shirts, whiskey and motorbikes, I am willing to bet Trump is very afraid now), many noted that the political earthquake that just happened in Italy will be seen as a turning point in EU politics: It was the first time that voters overwhelmingly rejected EU fiscal rules, banking codes and migrant policies, all at once. (It’s hard to blame them, even today, Italy’s GDP is 6% below its pre-2007 peak.) Salvini, currently the most popular Italian politician, wasted no time and called the euro ’a failure’ and telling Brussels that ’we couldn’t give a damn about bond spreads’.  At the minimum, tough times are coming between the next Italian government and Berlin, but after some conflicts, an avalanche of changing Eurozone rules (like deficit limits) is in the cards, too. (Leaving the Euro seems to be too unpopular for these parties for now, but they might well threaten with it or make sure it weakens.)

 

 

Have a nice day,

Mihály

 

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