Market update: Solid US data and friendly Italian comments help the sentiment, EU banks spiral lower

4 Jun

by Mihály Tatár

 

Good Morning!

 

  • The pretty solid US employment figures (223,000 jobs created in May, with the unemployment rate dropping to 3.8% – the latter is lowest since 1969, but hey, the tax reforms were really bad for the common people, as the media asserted at the time), coupled with the new Italian finance minister Giovanni Tria repeating that he never wanted to leave the Eurozone (another ’never’), helped to sustain the relief rally (SPX +1.08%, DAX +0.95%, MIB +1.49%, Nikkei +1.33%, Shanghai +0.65%, EURUSD 1.17, US 10Y yield 2.91%). Regarding Italy, it’s worth mentioning that the winning parties – who now plan to introduce universal basic income, large tax cuts and kick out migrants all at once – also showed their high regard for Brussels by naming the rejected-for-finance anti-German, anti-Euro Savona as being responsible for European Affairs. (This comes at a time when Merkel proposes a Security Council for the EU. One has to wonder why this hasn’t been done when Brussels had much larger political capital, and assume that either Rome or Berlin lives in an alternative reality.) The trade tensions increased dramatically before the G7 summit in Quebec – the EU and Canada threatened with retaliation in case the US tariffs on steel and aluminium are launched – with analysts and the EU seeming to think that Trump changes his mind so often that with counter-threats he can be neutralized. (The issue with this is, of course, that if you have been enjoying a large trade surplus with a country who otherwise has an extremely large and developed internal  market, your threats sound less convincing. Or as US economic adviser Larry Kudlow put it, ’blame those who don’t want reciprocal trading.’)

 

  • The downward spiral of European banks – especially those with real or rumoured vulnerability to Italy – continued relentlessly, with only a minor bounce on Friday (Unicredit -20% since May, Intesa -18%, BNP -16%, SocGen -17% – giving this a special flavor, Unicredit is said to consider a merger with SocGen – Deutsche Bank -18% – the long-time trader suspicion that once mighty Deutsche is a dead bank walking got affirmed when S&P cut its rating and the US put the bank on its regulatory watchlist -, Sabadell -8%, Banco Santander -12%, even Erste -10%.) The issue, as always, is less about mathematical asset exposure than the market’s fear of the unknown: We simply do not know what the ECB can and will do if Italians starts to play tough. (Will Frankfurt postpone the rate normalization? Will they keep buying Italian debt? If no, who else will and at  what price? Will anyone save a bank going under because of optimistic bets on Italy? Can the ECB give cheap money to weak European banks but stop Italians from using it? And so on.)

 

  • With the historical Singapore summit only 9 days away, North Korea’s Kim suddenly began purging the military (replacing among others  the top three defense officials). This is the latest sign that the  North Korean side, unlike in the last 30 years, is serious and got Trump’s ’or else we will completely destroy you’ message. In the meantime, heavily underreported despite being the most important single political news, the construction of the Trump Wall began into San Diego. (As mentioned several times before, the only thing that really matters for the Trump-base is immigration: I suspect that if at least a 100 miles will be built until the mid-term elections, their turnover will be the same as in 2016.)

 

Have a nice week,

Mihaly

 

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