Market update: Stocks burst higher on trade war optimism, Trump attacks Theresa May

13 Jul

by Mihály Tatár

 

Good Morning!

 

  • On the notion that China will blink in the so-called trade war – as one strategist put it, ’we are the 155th exporter country in the world in the ratio of GDP, who is to lose more?’ stocks resumed their rally (SPX +0.87%, Nasdaq +1.39%, DAX +0.61%, Nikkei +2.03%, even Shanghai +0.49%). The positive sentiment was reinforced by Trump’s symbolic gesture to let Chinese telecom equipment giant ZTE buy essential US components  – ZTE promptly jumped 25% -, the always excited start of the earnings season and also the high but-no-disaster-yet US inflation data (2.9% Y/Y, fasten your seat belts). To put the moves into perspective, the SPX index is now a mere 3% away from its record high, Nasdaq just reached a fresh historical record high, while DAX is down 3% for the year and Shanghai lost 25% since January in USD terms. (The media loves to talk about the US shooting itself in the foot with the tariffs – judging from the moves, no, the US has shot China in the foot.) So far, my 2018 prediction works out well – ’the long stock market rally will break this year but with a lot of volatile yo-yo movements’). In the general happyness, traders spent the time by buying Dollars (EURUSD 1.1650, USDJPY 112.80), and particularly, selling the Pound  (GBPUSD 1.3165), after Trump went into assault on Theresa May during his UK visit (’Boris Johnson would be a great leader’, ’this is not what voters voted for’, ’soft Brexit kills any hope of a trade deal with the UK as the US would have to negotiate with the EU’ – oh-oh, he doesn’t think May will survive for long, does he?). (To add insult to the injury, he also called out London Mayor Sadiq Khan ’doing a terrible job in preventing crime and terrorism’ – indeed, London has become a knife and moped crime capital in Europe, but this was a gesture to please the Alt Right, of course). These developments completely overshadowed the May government releasing a 98-page ’white paper’ on how to do the soft-Brexit (calling for a free-trade, tariffs-free area for goods – not services, mind you, killing banks, and the European Court of Justice having the final say, crossing May’s own original red lines). Brussels is now in a dilemma: So far they refused this arrangement- which also infuriates Brexiters -, but saying no here would be the end of May-government and who knows who they have to deal with next. (It’s also worth mentioning that behind the layers of courtesy, Brexit politics have become quite war-like: Volkswagen, BMW and Daimler, for example, demand trade barriers to be erected against Britain – while at the same time push for the abolishing of EU car barriers towards the US to avoid Trump’s wrath. A clearly panicking Airbus warned of ’catastrophe’ if supply chain issues are not resolved soon – wings for Airbuses are built in Britain and then flown or shipped to Toulouse and it would take years to replace the operations, for example. ’An Airbus without wings is just a bus’, as the joke goes in the industry. )

 

  • Oil prices remained under pressure (WTI 70.10, Brent 73.90 USD), even with Trump threatening with ’escalation’ on Iran, and Secretary of State Pompeo telling US allies to ’cut off all funding’ , while promising to ’support Iranian voices’. Analysts – most of whom were bullish – are clearly at odds on what is going on, going into painful theories on the large price drop from the ’trade war effect’ to ’conflicting supply signals’. (Personally I stay at the simplest explanation: The market was brutally one-sided – long -, the risk/reward preferred selling when Trump talked it forcefully down.) Most analyst pieces now talk of a ’buying opportunity’ as fundamentals are bullish – trouble is, they were also bullish two days ago but when price was 6% higher.

 

Have a nice day,

Mihály

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