Market update: Tensions jump before the G-7, the ECB ignores Italy for now

8 Jun

by Mihály Tatár

 

Good Morning!

 

  • After a strong week, investors hit the brakes before the G-7 trade showdown in Quebec (SPX -0.07%, Nasdaq -0.70%, DAX -0.15%, Nikkei -0.41%, Shanghai -1.32%), with traders wondering how low things can get. (Apparently, very low – Germany and France plan to pressure Trump on – what else -, environmental issues and getting exemptions from the Iran sanctions, and thought the best way to achieve this was Macron talking about ’a US not needed in the G-7’ and Merkel calling for Europe to step up against ’Trump’s new world order’. The furious US President retaliated by announcing to leave the summit earlier, while Canadian PM Trudeau – who reportedly had such a heated argument with Trump over the phone that the latter reminded him of the burning of the White House in 1812 – a favorite war story of Canadians. In the meantime, Trudeau’s pro-immigration, pro-free-trade Liberal Party just got wiped out in the Ontario elections. ) The Euro jumped after the ECB signalled that the June meeting was ’live’ regarding the phasing out of bond purchases – the programme is expected to be finished this year and the majority predicts the first rate hike, from -0.40% to -0.20%, at mid 2019 – which many also interpreted as a threat aimed at the new Italian government. (The Eurozone inflation – except for Germany – is nowhere where the ECB said it wants it to be, and the Italian financial market has been held above water by Frankfurt. (EURUSD 1.1840, Italian stocks and bonds erasing this week’s gains.) Oil prices continued their volatile bounce (WTI 65.80, Brent 77 USD), partly on Iraq fiercely resisting an output increase before the June 22 OPEC meeting and fresh news about the Venezulean oil facilities breaking down, but technically, this also a classic short squeeze: Traders first interpreted the news, that the US requested the OPEC to increase its production by 1 million barrel per day, as a negative, but later it became clear that this was a preemptive step before the Iran sanctions renewal (and actually shows that the US has quite a room of manouver against Iran).

 

  • Emerging markets had a pretty volatile day: Argentina, after the dramatic market declines, secured a 50 billion USD IMF stand-by arrangement. (This is the largest ever programme in IMF history. One has to wonder that if Argentine needs this amount of money, how much other, much larger countries will need to ask for.) The selling of Brazil continued – the Real extended its decline to 20% this year, or almost 80% since 2014 -, with the Turkish Lira being the only one to moderately strengthen, after the central bank – going against President Erdogan’s wishes for lower interest rates – hiked the benchmark rate to 17.75% (!). It should be noted that  this ’emerging market shock wave’ comes with the Fed tightening far from being over and the ECB tightening not even being started yet.

 

 

Have a nice day,

Mihály

 

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