Market update: US CPI data, Turkish rate hike helps sentiment, euro to become the world currency

14 Sep

by Mihály Tatár

 

Good Morning!

 

  • Markets sighed with relief that the US inflation data was not Fed-provokingly high (Y/Y 2.7%, core 2.2%, SPX +0.53%, Nasdaq +0.75% – again led by Apple +2.4%, DAX +0.19%, Warsaw +1.12%, Nikkei +0.90%, Shanghai +0.01%). The EURUSD rallied to 1.17 – while not changing anything in the plan,  – bond purchases end in December, first rate hike only next September – , Draghi made an upbeat assessment of the Eurozone, while the GBP rallied to 1.3120 on Governor Carney’s warning that even a no-deal Brexit would result in rate hikes – because of the tariffs-induced inflation – and house prices would fall 35% in the UK. (For the latter, he received the ’high priest of project Fear’ title from the Brexiteers. He is probably right tough  – the question is, however, how much will house prices fall on this mismanaged Brexit-with-a-deal?). Emerging markets focused on Turkey, where the central bank finally delivered and raised the benchmark rate from 17.75% to 24% in one step (!), resulting in a 5% Lira short-squeeze. (While nobody honestly thinks the crisis is over – a 180 degree economic policy turnabout and a friendly US would be needed for that, and even then, the cleaning up of the mess would need painful years  – the signal reinforced the emerging currencies correction, EURHUF 324, Indian Rupee 71.80, Mexican Peso 18.82).

 

  • EU Comission President Juncker’s call that the euro should take on the role of the world’s leading currency resulted in busy and high-flying discussions among analysts and financial media hosts. (Of course, the excitement is not unrelated to the conflict over the Iran sanctions and the EU’s refound purpose in fighting Trump.)  Most bank commentators focus on the argument that not politics, but markets and economic rationality dictate which is the dominant currency – that’s why China and Russia has been rebuked every time they tried to go around Dollar trading since 2009. Personally I would also add that geopolitics play a role, too: Which country has 12 fleets and a rule of law to protect your investments and Dollar holdings? It’s also worth noting that the real power of US sanctions is not the US Dollar itself – that’s a technicality – any European company that does not comply with US sanctions risks landing on a US blacklist and losing its banks, suppliers and customers. As one strategist put it, the EU talked tough as always regarding the hated US sanctions on Iran but no European Minister of Finance stepped forward with the necessary resources and promised to compensate affected companies. Until the EU gets its act together the Euro remains an important, but watched-with-concern trading currency.

 

  • China agreed to extend a 5 billion USD credit line to cash-strapped and near-collapse Venezuela. This is actually a big disappointment for President Maduro – he was expecting more, and while the terms were not announced, many suspect that either the interest rate or the oil price fix (on future exports, from which the country plans to repay) weren’t that friendly than in the good old times. (As a sidenote, many were surprised to find out from leaks that the US held several meetings with Venezuelan military officers wanting to overthrow the regime, but the US refused to help. It actually shouldn’t be a surprise, and Venezuela’s neighbors don’t intervene either: ’If you break it, you own it’, and nobody has the stomach pay the price for applied socialism.

 

Have a nice day,

Mihály

 

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