Market update: US manufacturing jumps to 14-year high, traders taken aback by their own emerging markets selling

5 Sep

by Mihály Tatár

 

Good Morning!

 

  • Stocks kept retreating on Tuesday (SPX -0.17%, outperforming again, Nasdaq -0.23% with Amazon briefly hitting the magic 1 trillion USD in market capitalization, DAX -1.1%, Warsaw -1.48%,  Nikkei -0.11%, Shanghai -1.08% as usual), with traders watching the non-stop emerging market selloff in disbelief: The South African Rand dropped by 4.6% on the news that the country is in recession (this was a surprise for many, which is strange if you consider that the government has been talking about nationalizations for several months – breaking news, taking property without compensation destroys the economy), the Turkish Lira slipped lower to 6.70 per Dollar (the Turkish finance minister ’does not expect any problems in the banking sector’, with Turkish stocks having dropped 60% this year in USD terms but some banks down more than 70%, Garanti bank 2027 euro bonds, for example, trade with a yield of almost 19% – investors must be idiots to think otherwise), the Indian Rupee crashed to a fresh record low, the Indonesian Rupiah approached its 1998 Asian crisis record lows, with the MSCI emerging stocks index extending its drop by 2% to 19% since late January. Naturally, regional currencies also felt which way the wind is blowing (EURHUF 328, EURPLN 4.31), and adding insult to the injury, the US Manufacturing ISM jumped to a 14-year high (forcing the mainstream analyst profession to nervously type complex rationalizations of how this could have happened and further eroding the narrative that growth peaked in 2Q, or that Trump’s policies hurt the US economy), sending US yields higher (10Y at 2.90% again, the EURUSD is testing 1.1530). As discussed back in 2016 and 2017, the pulling back of central bank easy money from global markets is gradually resulting in a ’back to reality’ trading, with reckless countries and companies going under and overpriced assets from stocks to bonds finding a more sustainable level (to name just two examples, this is the first time I hear questions asked about Facebook’s long term profitability and Italy’s CDS is trading at the level of Oman or South Africa – the latter tells you how much of the Italian bond pricing is distorted by the ECB monetary programme, for now.)

 

  • German Chancellor Angela Merkel suddenly made comments in support of moving the global euro clearing – mostly done in London – to Frankfurt (’one would say logic doesn’t stand against it’), with shocked commentators wondering what this was about (lobbying by German banks? a way to make Theresa May panic? Not allowing the City to clear euro derivatives after Brexit would be devastating in the UK’s role as a financial center, as this is a multi-trillion euro business, and so far nor Berlin nor Paris went so far to officially propose it despite the occasional tough talk.) While objectively it is true that a non-euro, non-EU country shouldn’t be so influential in this critical business, this change would be so drastic that a more assertive UK government would immediately retaliate (do you want order in the Mediterrian Sea? Then use your own warships and intelligence services!), in my personal opinion.

 

Have a nice day,

Mihály

 

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