Market update: Merkel and May in strange competition, risk rally continues

9 Jul

by Mihály Tatár

 

Good Morning!

 

  •  Friday’s US employment figures were just perfect from the market’s perspective, showing an even stronger job market (+202.000 jobs created in June) but with only limited wage inflation (2.7%) to undercut stock profitability and provoke the Fed, allowing the risk rally to continue and make fun of the trade war apocalypse predictions (SPX +0.85%, Nasdaq +1.34%, DAX +0.26%, Nikkei +1.30%, even Shanghai +2.06% with Beijing clearly restraining itself). To be fair, the story is not over, and after the shorts are squeezed out, traders will begin to wonder what the tariffs-domino and Trump’s infrastructure plan mean for inflation, for example, in my view.  The Dollar continued to weaken (EURUSD 1.1760) and risk-sensitive currencies rebounded further (EURHUF 323, EURPLN 3.348, EURCZK 25.87, even TRY 4.562, BRL 3.862), with the main under-performer being the British Pound (GBP 1.3285, EURGBP 0.9946) as the Brexit-ministers resigned, throwing the May government into a  fresh crisis. (This is not a small meltdown of political power: The normally very polite ex-Brexit Secretary David Davis went so far to talk about May putting the UK ’in a weak negotiating position’ and essentially ’giving up the control of the economy’ to the EU, while his circle was even harsher and tweeted about ’selling out the country’. Merkel and May seem to be in a competition in becoming the most failed leader – May has some advantage here because if even Boris Johnson resigns, the party is over. You know that something is wrong when the EU regularly intervenes to stabilize May’s position and chief negotiator Barnier talks about his ’real respect for Theresa May’. To borrow from Game of Thrones, if you need to tell people you are a king, you are not a king.)

 

  • As the  NATO summit in Brussels and the Trump-Putin meeting in Helsinki approaches, the mainstream media went into outright panic mode (Washington Post warns you to  ’prepare for catastrophe’, for example, meaning, NATO could start to collapse any minute now).  In my personal opinion, while Trump is indeed pretty harsh (he called NATO ’as bad as NAFTA’), demanding much larger resources for defense spending is a strange way to destroy to an alliance, and remember, Germany, for example, has been so loyal that all its submarines, half its tanks and most of its warplanes are not ready for duty, according to the German media. While supposedly senior EU officials are afraid of Trump demonstrating a disunited NATO and then heading for Putin to getting rid of sanctions, what they really fear is Trump blackmailing them to actually do something- that’s why EU politicians repeat every two hours these days that ’trade and defense spending must not be tied together’. In the meantime, more and more major multinational companies are leaving Iran  – Dutch airline KLM and cargo shipping leader CMA CGM being the latest departures – showing the effectiveness of the reimposed US sanctions and humiliating every effort to maintain the status quo.

 

 

 

Have a nice week,

Mihály

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