Market update: The Fed is happy but guards its tongue, Trump kicks into OPEC

14 Jun

by Mihály Tatár

 

Good Morning!

 

  • The Fed raised by 25 basis points (to 2%) and Powell gave a speech which could be described as moderately hawkish (’the economy is in great shape’, ’no sign that trade tensions have a big impact on growth’, ’people looking for jobs find them’, but also emphasized the need for gradual rate hikes, forecasting only two more this year). The moderately hawkish speech resulted in a moderately negative reaction (SPX -0.40%, Dow -0.47%, Nikkei -0.51%, Shanghai -0.54%, US 10Y yield 2.97%), and traders didn’t have the luxury to analyze the perspective further with the news that Trump may announce the first wave of Chinese tariffs (worth 50 billion USD) on Friday – just as the Chinese macro data showed a slowdown (industrial output, retail sales, fixed-asset investment all coming in softer than expected). This shouldn’t have been really a surprise, of course, and anyone who is still doubting the seriousness of this US Administration should look at the fate of Chinese telecom giant ZTE Corp, which reopened in -42% yesteday after Washington nearly complete killed it for Iran sanction violations and to make an example before the trade talks start in earnest. The EURUSD itself hoovered around 1.18 before today’s key ECB meeting, and while analysts are obsessed with questions like when the asset purchase programme will exactly end or what Draghi says about the date of the first rate hike, it will be much more interesting to see what Draghi has to say, or rather, what message he sends, to Italy. (This is a nice hostage situation play, by the way: Draghi will need to pressure the new government without actually cornering it.)  As predicted here, high oil prices don’t look good before mid-term elections and Trump Tweeted again (’Oil prices are too high, OPEC is at it again. No good!’) – but the market reaction was obscured this time with the IEA coming out whith a report that Iran and Venezuela could lose almost 30% of their oil output next year (WTI 66.60, Brent 76.50 USD).

 

  • Despite the universal international pressure,  the Saudi-UAE assault against the key Yemeni port of Hodeida was launched yesterday. This battle may be decisive in the war – if such a thing exists in Middle East conflicts – as almost all rebel supplies come through this coastal city (but also 80% of humanitarian aid, making the UN warn of 250.000 civilians deaths). In the meantime, Iran warned again that uranium enrichment will proceed in Fordow as soon as the Supreme Leaders orders it – this is signal of defiance after the Singapure summit, and as the USS Truman carrier strike goup arrived in the region. (As a latest sign of the close US-Russian cooperation, Syrian Kurds entered into unprecedented direct negotations with the Assad government – imagine this even one year ago.) Over in Turkey, the Lira started to weaken again (USDTRY 4.6765), after the latest polls showed a tight vote on 24/June – if markets really hate something, it’s uncertainty and potential chaos – and as President Erdogan threatened to conduct operations against Moody’s (!).

 

  • The EU proudly proclaimed that only European suppliers may take part in its ’colossal’ European Defense Fund project – meaning the UK is out -, in a clear effort to look busy in ’bolstering military capabilities’.  (We are talking about 15 billion USD worth of research and equipment development between 2021 and 2027 (!), to put this into perspective, the US spends USD 45 billion per year only on Afghanistan). This won’t fly well with Washington, and trashing German hopes of a ’temporary’ Trump, in New Carolina the anti-Trump Republican nominee was just wiped out. (Trump’s approval rating with Republicans is at 87% – to give a feel, this is the second largest in history surpassed only by that of George W. Bush after 9/11.)

 

Have a nice day,

Mihály

 

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