Market update: Draghi carpet bombs the Euro

15 Jun

by Mihály Tatár

 

Good Morning!

 

  • Not only did Draghi promise to keep rates unchanged until at least the summer of 2019 – and wind down bond purchases only very gradually until the end of the year, both dovish shockers – but he also refrained from sending any powerful message regarding Italy. This left the market with a hawkish, steadily-raising Fed and a very accomodative ECB – resulting naturally in a massive Euro selling and Dollar buying (EURUSD crashed from 1.1850 to 1.1570). With the monetary stances now clear, traders reactivated the ’emerging currency massacre’ theme (against the Dollar, Argentine Peso -8.6%, Brazil Real -2.6%, Turkish Lira -2%, Forint -2.6% – USDHUF 279, Zloty -2% – USDPLN 3.70, Romanian Leu -1.7% – USDRON 4.037, Czech Koruna -2.3% – USCZK 22.28 -, Croatian Kuna -2% – USDHRK 6.39), with several hedge fund managers, seeing the parallel tightening of the Fed, the ECB, and the Bank of Japan commenting that it’s a ’good time to panic’ for emerging markets. (Personally I am surprised at the surprise: Did anyone believe that the unprecedented monetary expansion after the 2008 crisis will go on forever, even when global growth hits a 10 year high? Those countries and companies with high debt burden had 10 years to prepare. Yet,  according to Bank of International Settlements, offshore USD debt, mostly company debt of East Asia, Latin America and that of Turkey, has jumped five-fold to 11 trillion USD since the early 2000s, and overall emerging market debt has jumped  from 145% to 210%. Nice work.)  Somewhat funnily, Draghi dismissed complaints that the negative rates damage savers, and pointed out that savers don’t have to keep their money in deposits and can buy other assets (meaning stocks and bonds). This is a rich statement to make, and a central banker classic by the way – for example, German real estate prices rose 40% during the past five years, pricing out the middle class of urban markets or forcing them to take on loans,  resulting in widespread tensions and anger. Not to mention, burned by the 2008 crash, only 10% of Germans own stocks. Anyway, traders for now heeded  the advice and bought stocks and bonds (DAX +1.68%, MIB +1.22%, CAC +1.39%, German 10Y yield dropping to 0.42%, lets hope it takes some time for the new Italian government to organize itself and start getting tough.)

 

  • Shocking even veteran geopolitics watchers, the North Korean state media aired an incredible, unprecedently revealing  video about the Kim-Trump summit. It’s not just that Trump was portrayed in a positive, father-like light (this is Asia, mind you, this is in itself very important), but the movie displays all the luxury of Singapure, including the buildings, the cars, even well- clothed people with mobile phones and swimming pools. This is probably the first glimpse of many North Koreans ever had of Western lifestyle, and the fact that this video was allowed to be shown sends the message that if you follow Kim, this future is possible.

 

  • The new data of oil major BP puts the EU’s latest green-regulation and ’greenify investments’ crusade in perspective: Global carbon dioxide and coal consumption both rose in 2017 (!), and the fuel mix in the electric power sector has changed little in 20 years. (No to mention overall global energy consumption grew 2.2% in 2017. That’s why the over- reported renewables generation, while indeed surging, barely shows up in total figures. Coal’s share of the global power mix in 1998 was 38%, and in 2017 it was.. 38%. While I am a big fan of clean energy, in my personal opinion, today’s movement, concentrating on overregulation, feels badly misplaced.)

 

 

Have a nice day,

Mihály

 

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