Market update: New China tariffs fizzle the rally, US yields advance, Turkish banks sell their gold

17 Sep

by Mihály Tatár

 

Good Morning!

 

  • The ’low-US-inflation rally’ gradually fizzled out on Friday (SPX +0.03%, Nasdaq -0.05%, DAX +0.57%, Warsaw +0.24%, Shanghai -1.13%, EURUSD 1.1630), as the US industrial production rose  more than expected – this slowdown just doesn’t arrive – and as Trump gave the orders to proceed with the fresh tariffs on 200 billion USD worth of Chinese imports. (Somewhat funnily, the financial media reports that Beijing is ‘considering to strike back by distorting the supply chain – materials, equipment etc. – of key US companies’, in absence of imports to hit with tariffs, and that ‘Trump may be running low on products he can target’. This narrative, of course, has it exactly backwards: The whole point of the campaign is to reorientate the US-China trade, and US companies being forced to use non-Chinese sources would actually be seen as a huge win by the White House.) As usual, the stronger USD put fresh pressure on emerging currencies (Indian Rupee testing its record low again, Argentine Peso -4%, Turkish Lira giving back some of its gains, EURHUF 325), especially as US yields quietly advanced higher (2Y 2.78%, 10Y yield 3%), as expected here. (As discussed back last year, the 3% level in the US 10Y yield is a critical for global markets, a breakout higher from here will result in consequences everywhere from trading Croatian Dollar bonds to North American stock trading.) By now more and more strategists realize – which is no surprise for regular readers – that Trump loves, loves to spend, especially by using others’ money (debt). As Axios reports, he had several clashes with his former economic adviser Gary Cohn, who – being an ex-Goldman Sachs leader – tried to warn him against overleverage. It totally backfired, and Trump lectured Cohn on how he used to play banks against each other to achieve 100% leverage during construction projects. This is not a theoretical question: The US President promised a 1 trillion USD package for infrastructure – it is actually hard to argue with the aim,  US infrastructure like airports and train networks, mostly built several decades ago, look pathetic by now compared to their Chinese peers, for example –  but the US debt just surpassed the surreal 21 trillion USD mark, meaning, the patience of global investors can only be bought with higher yields.  The not-that-surprising trade war developments weighted on commodities, too (Copper -2%, or -22% from January, Gold back under 1200 USD again – the market talk is that Turkish banks anxiously sold as much as 4.5 billion USD worth of gold to stay liquid – and oil prices also slipped lower, WTI 68.90, Brent 78 USD, with traders pondering about this weekend’s OPEC meeting in Algiers.)

 

  • US naval, air and Marine forces have launched complex war games from Djibouti, simulating an Iranian blockade on the Strait of Hormuz in the Persian Gulf and the Red Sea’s Straits of Bab al-Mandeb. Some 4,500 troops practice a counterattack and for the first time in the region, the new F-35 stealth fighters are also openly taking part in the exercises as a further message to Teheran. In the meantime, Japan confirmed it is changing its post-World War II constitution on self-defense to accelerate the military re-armament, showing that the even the last remaining idealists in Asia now know better.

 

 

Have a nice week,

Mihály

 

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