Market update: Chinese stocks lead the market lower, a hawkish Fed strengthens the Dollar

2 Aug

by Mihály Tatár

 

Good Morning!

 

  • Markets suffered a one-two punch on Wednesday with Trump’s threat to raise Chinese tariffs straight to 25% on 200 billion USD of imported goods and at the same time the Fed becoming more hawkish and cementing expectations for two more rate hikes this year (SPX -0.10%, Dow -0.32%, DAX -0.53%, Nikkei -1.02%, Shanghai -3% – ups, the US ’has shot itself in the foot’ again so much that Chinese stocks are now down 30% since January in Dollar terms). Tech stocks had a somewhat better day (Nasdaq +0.46%, Facebook -0.56%, Amazon +1%, Twitter +0.26%, Apple +6% – squeezing shorts, and Google +0.42% on the ’good news’ that it agreed to use a censored search engine in China – traders liked this item as China has 770 million Internet users, but in my view, the development shows how little the management understands the new political winds in the US). The Dollar, naturally, strengthened, as Trump’s comments on the too rapid rate hikes and too strong Dollar were pushed aside: EURUSD 1.1640, USDHUF 275.50, USDPLN 3.66, USDCZK 21.97, the Yuan extended its decline to 9% since January – this won’t fly with Washington either and showing that something had to have happened at the Trump-Juncker meeting, Berlin vetoed – and this is a first – the Chinese purchase of machine tool manufacturer Leifeld Metal Spinning AG, a top-notch machinery producer. The Turkish Lira dropped to a fresh record low to 5 per Dollar – that’s a 80% depreciation since mid-2016 – , after the US imposed sanctions on two Turkish ministers on the model of the Russian sanctions, ignoring angry Turkish warnings of consequences. Yields also continued higher (US 2Y 2.68%, US 10Y 3%), not only on the Fed but also on the growing realization that Washington is borrowing at an alarming pace – the US Treasury revealed that it expects to issue 770 billion US of new debt (!) in the second half of the year – the tax cuts and the military rearmament at the same time cost a lot of money – which analysts called ’the absolute height of fiscal irresponsibility’.  (As forecasted here back in 2017, Trump always liked to spend borrowed money, and never had to fully repay in real terms. Don’t worry, he won’t get disturbed.) ’Great buying opportunity’ oil prices continued lower (WTI 67.70, Brent 72.40 USD), as expected, attributed to Suadi Arabia pumping near record amounts (10.65 mio barrels per day in July) and Russia also approaching its post-Soviet record of 11.21 million bpd), but what keeps hedge fund oil traders up at night is a potential US intervention to put prices lower before the US midterm elections.

 

  • Just as Iran announced massive military exercises to ’demonstrate its ability to shut down the Strait of Hormuz’ – the crucial waterway of global energy supplies – , Israeli PM Netanyahu watned Iran against blocking the Red Sea routes (the Bab el-Mandeb Strait, where Saudi Arabia last week had to stop oil shipments after missile attacks on oil tankers), which would ’encounter an international coalition including Israel with the full array of its military capabilities’. Many geopolitical analysts wonder why Iran is not backtracking somewhat before its too late – the main reason is simply internal, in my opinion, for example the Iranian parliament summoned President Rouhani (!) to answer questions on his handling of the currency crisis. There are also rumours that Trump wants to ’pull a North Korea’ on the situation – threatening the Iranian regime  with total destruction and suddenly announce a one-on-one meeting with Rouhani with a deal package, brokered by Oman – but Teheran is vehemently denying it would be willing to go down this path.

 

 

Have a nice day,

Mihály

 

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