Market update: Hawks circling over the markets, verbal intervention strengthens the Forint

13 Jun

by Mihály Tatár


Good Morning!


  • Unlike the mainstream media, traders acknowledged that everything went according to plan with the unprecedented Kim – Trump summit (SPX +0.17%, DAX +0.00%, MIB +0.15%, Nikkei +0.47%, safe havens Gold -0.45%, Yen -1%, no classic ’buy the rumour sell the fact’ as in essence, Trump is offering formal dipomatic recognition of the North Korean regime and an economic windfall in form of South Korean investments in return of full de-nuclearization. Hey, where is the Nobel Peace Prize comittee?). The focus immediately returned to the cruical events of the week – according to some, the whole year -,  today’s Fed meeting and tomorrow’s ECB session. It’s worth noting that both central banks are now at important crossroads in managing market expectations: Today’s Fed rate hike is for granted but with US inflation running at 2.8% Y/Y, and unemployment at 3.8%, the market is wondering if the Fed was too dovish up until now to avoid looking too aggressive with the new chairman. (If traders indeed start to price in two more rate hikes for this year, and four for the next, emerging markets better watch out.) The situation is the same with the ECB: With the latest Italian noises – even the eurosceptic Minister of European Affairs, the vetoed-for-finance-minister Savona claimed to support the euro – and the hawkish ECB signals, the market now expects a gradual tightening and a rising Euro  – bank analysts forecast exchange rates from 1.23 to 1.30 by next year against the Dollar.  (In my view, analysts still vastly underestimate the Italian winning parties’ skill and determination to sabotage the Eurozone rules – already they play Brussels and the markets much better than the amateurish Greek leadership ever did. The Italian drama will continue to drag on, but with an on-off character, unlike the tv-event-like 2012 European Debt Crisis.)


  • Seeing the massive underperformance of the Forint, the Hungarian Central Bank (MNB) verbally intervened (’the National Bank of Hungary is prepared to shift policy and tighten monetary conditions if the forint depreciation endangers its inflation target’), pushing the EURHUF back down to 319.60. The timing was pretty good  – it’s always dangerous when traders want to experiment with a new exchange rate zone, like 330 -, but now we know that the market definitely thinks Hungarian monetary conditions are too loose and I suspect the majority thinks that in case of emergency, the MNB will rather let the Forint fall than raise rates rapidly, and threaten the government’s growth targets. In the meantime, despite the Turkish Lira now moving sideways after the rate hikes, the slow-motion collapse of the Turkish economy continues (the stock market lost 36% in Dollar terms, and credit markets price crisis: Turkey’s largest private lender, Garanti bank’s 10Y euro bond yield jumped from 3% to 7% (!), Halka Bank lost 63% of its value, in a time when producer price rose 20% Y/Y in May and President Erdogan threatened Austria with a ’war between the Crescent and the Cross’).


  • The shock of the G7 events keeps dominating the political sentiment in the EU (’Trump is treating America’s allies worse than its enemies’, ’Europe must draw the consequences and isolate Trump on the international stage’, ’the end of the postwar, rule-based world order’ (the latter is especially rich in my personal opinion, with these countries never taking NATO’s 2% military spending rule seriously and piggypacking US defense for three decades, to build their cozy welfare states). French President Macron even Tweeted ’no leader is eternal’, aimed at Trump. This sentiment won’t end well because the EU faces the most active US President since Ronald Reagan – Trump even left the G7 summit with the humiliating words ’we have a world to run’. By now the perception is widespread that Angela Merkel is losing control quickly – if you don’t believe me, read it in Germany’s Der Spiegel, which writes about ’Berlin’s schoolteacher style during the euro crisis coming back to haunt her’- imagine this line, from this newspaper,  even two years ago.


Have a nice day,



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