Market update: Fitch warns Italy, coal strikes back, Silk Road has image problems

3 Sep

by Mihály Tatár

 

Good Morning!

 

  • Apart from US traders passing before Monday’s Labor day holiday, the sentiment remained sour (SPX +0.01%, Nasdaq +0.26%, DAX -1.04%, Milano -1.10% with Fitch lowering Italy’s credit outlook to negative BBB – to put the move into perspective, Italian stocks dropped 18% since the spring elections, with ’successfully healed’ Unicredit shredding more than 30% (!) from already humiliating levels, Nikkei -0.66%, Shanghai -1.03% after another disappointing PMI data, but hey, we were assured the entire tariff story is a mere 0.2% worth of China’s GDP, this can surely not go out of hand). Traders kept moving into Dollars (EURUSD 1.16 – so far  no follow through from Trump on weaking the USD – , the Pound dropped to 1.29 on Theresa May ruling out a second Brexit referendum again – British politics will heat up massively now with lawmakers returning to work and May’s battle for survival continues. The Indonesian Rupiah collapsed to a 20-year-low against the Dollar but otherwise emerging currencies stayed quiet – TRY 6.59, EURHUF 326.40, EURPLN 4.300). In commodities, the divergence between construction-sensitive metals (Copper -1.6%, Aluminium -2.5%) and energy commodities widened even further  (WT 69.60, Brent 77.50 USD – Iranian oil exports dropped to a 2-year-low of 2.1 million barrels per day, while, somewhat funnily, ’evil, no green, soon-to-be-banned’ European coal prices rallied to almost 100 Dollars a ton, or a 5-year-high, on robust electricity demand, including from China (where consumption jumps this year by 7.6% Y/Y, according to Bloomberg).

 

  • Iran ramped up its efforts to block a US-Israeli military campaign against its forces in Syria by leaking it has supplied Iraqi shiite militias with ground-to-ground missiles capable of reaching Riyadh and Tel Aviv. The US reaction was clearly unsurprised and hostile – while Syria and Russia also rejected US warnings against a major offensive on the final rebel stronghold Idlib. (It’s worth noting that Teheran’s strategy to avoid an attack – spreading its forces to nearby countries to make a military operation a politically risky mess – is also the exact reason why they will be eventually launched.) In the meantime, the chaos intensified in Libya – the UN-backed government had to announce a case of emergency after non-stop fighting in Tripoli, and the US – after several suspensions – finally officially cancelled a 300 million USD aid programme to Pakistan. (This is one of many. As forecasted here back in 2016, the relationship is by now in a freefall and a Pakistani retaliation is to be expected. It’s no wonder the Taliban – with whom US forces started cease fire negotations last year – decided that this is the right time to intensify the war in Afghanistan.)

 

  • Strategists note that China’s colossal ’New Silk Road’ project had hit a few roadblocks lately, and has serious image problems these days. (This could be also seen on frantic Chinese efforts to praise participating countries, President Xi even stressed it is ’an open and inclusive process, not about creating exclusive circles or a China club’.) It’s not just Trump’s political war on China that shows the project in a different light – several participating countries made political U-turns: Malaysia pulled out of a major railway plan, Myanmar from a port project and Nepal from building hydroelectic dams, all afraid of falling into a no-return debt trap. (Making a joke of this, the former foreign minister of Australia called Laos and Cambodia a ’wholly owned subsidiary of China’, after they borrowed more than 5 billion USD, and Pakistan is even more dependent on loans from Beijing.)

 

 

Have a nice week, Mihaly

 

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