Market update: Rising yields stabilize the Dollar, Italy quietly attacks Eurozone rules, Forint in the spotlight

24 Jul

by Mihály Tatár

 

Good Morning!

 

  • Western markets remained in sideways mode mostly focusing on earnings season news (SPX +0.18%, Nasdaq +0.28%, DAX -0.10%): Google surprised to the topside, reporting a nice 26.6 billion USD in quarterly sales,  resulting in a 6% share price jump, while Amazon temporarily dropped 2.4% after Trump called Washington Post ’a lobbyist for Amazon’, and that the latter should be investigated for antitrust issues. Asian markets become more upbeat after China unveiled a – small – fiscal package to boost domestic demand – a sign that Beijing starts to take the market pressure seriously (Nikkei +0.56%, Shanghai +1.71%). The main development, however, was that yields kept rising (US 10Y yield 2.95%, 2Y yield 2.628% – the highest since 2008, German 10Y yield 0.41%), attributed to the Bank of Japan considering to join the club of tightening central banks, but also on the ’Trump is not an inflation fighter’ theme discussed earlier. The rising yields, in turn, stabilized the US Dollar (EURUSD 1.1680 – the market is wondering what Draghi has to say on Trump’s USD comments at the ECB meeting on Thursday, GBPUSD 1.3090 – May’s approval rating dropped to a truly humiliating 16% and 38% of the polled would vote for a new right-wing Brexit party instead), also not helping commodities (WTI 67.60, Brent 72.80 USD, Gold 1220 USD, or -11% since April, with only Copper higher a bit on the Chinese package). Regional traders watch the Hungarian Central Bank (MNB) rate decision today – no actual change is expected, but after ’the adventure’ to 330 in EURHUF, even small communication tweaks are received as very important. (It’s worth noting that in the meantime, the Czech central bank is expected to raise rates for the second time in a row, on a much lower, 2.2% inflation. My personal opinion here did not change since early 2017 when EURHUF was trading at 306: the MNB rate decision makers don’t mind a Forint weakening until it is orderly or gradual and focus on growth/competitiveness instead – unless domestic politics dictate otherwise, don’t be shocked at a 350 EURHUF rate especially if the going gets tough on global markets.)

 

  • It’s worth keeping an eye on Italy: While adrenaline-junkie traders shifted their attention to other market themes, and the media focused on ’Russian agents running the White House’ story, the League and the Five Star quietly overtook all key budget and financial commitees in Rome, and are now pushing against the EU’s budget restrictions to launch a massive fiscal stimulus. (’Brussels needs to review its rules’, announced Interior Minister and League-head Salvini – who called the Euro ’a crime against humanity’, by the way). Brussels is in a very dangerous position: It was one thing the deal with the politically amateur, and economically small Greeks, but entirely different with the economically large and politically cunning League leadership (Salvini is a master of push-and-pull at the limits, and his financial guru, Borghi, is a former trader of Deutche Bank to begin with). Even worse, the German narrative of ’discipline and patience’ is losing the argument badly, with Italy forecasted to grow a mere 1.3% in 2018 (the slowest of any Eurozone nation) with unemloyment still at 11% (from 6% pre-2008). International developments are different from the times of the Greek crisis as well: Canadian provinces rebel against their once super-popular, pro-immigration Prime Minister Trudeau, the Dutch Foreign Minister (!) was caught saying the truth that ’no peaceful multicultural societies exist – give me a single example’, and we know what happened to Merkel’s Willkommenskultur (by now journalist openly speculate if SPD Finance Minister Olaf Schulz would be following her as chancellor with the CDU dropping in the polls.)

 

Have a nice day,

Mihály

 

 

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