Market update: Traders careful before the Fed, Italian assets rally, Trump gives heavy-handed speech at UN

26 Sep

by Mihály Tatár

 

Good Morning!

 

  • Trading, as usual, slowed down before tonight’s important Fed meeting (SPX -0.13%, DAX +0.19%, , Warsaw +0.37%, Nikkei +0.14%, EURUSD 1.1760, US 10Y yield 3.09%, EURHUF 324, EURPLN 4.29), with the majority of the market expecting two rate hikes this year  – one tonight – , two next year and having a very unsure take on what is to going to happen next. (Will the Fed pause after pushing the upper bound funds rate to 3%, as some expect? Or rather, it has no plan at all and seeing the trade-war and wages-induced inflation, hikes will continue ’as normal’?). The few movers included the British Pound – GBP 1.3170 on the news that opposition Labour leader Jeremy Corbyn will meet EU officials in Brussels, you can bet the topic is not how to respect voters’ decision on Brexit  – while the French Finance Minister was openly declaring that it would be ’suicidal’ to grant the UK ’a deal that seems better than remaining in the EU.’ The latter is of course true, the only issue with it is that by this logic, the UK and the US should immediately leave NATO (’not spending on defense shouldn’t come with a better position then spending on it’) and see how the EU is managing its security and intelligence affairs worldwide. (I suspect this topic will come up anyway, if May’s successor is a stronger character.) Italian assets kept rallying (stocks +7% in September erasing some of the post-election losses, Italy 10Y yield 2.87%) with Rome playing cooperative for now and most analysts only expecting a ’moderate amount of budget cheating’ for 2019. (Mathematically speaking, the situation is not solvable – the 3% EU deficit limit and the brutal Italian debt burden would make the winning parties lame ducks for their entire governing period. Even the optimists are hoping that eventually A. the populist government collapses or B. there will be a behind-the-scenes deal with Brussels and Germany to do something about the Italian debt, turning ’the drama into an operett’, as one strategist put it. The less optimistic scenario is Italy systemically crushing EU rules and organizing an anti-Maastricht coalition.)

 

  • Quite typically, the mainstream media focused on some delegations laughing at Trump during his speech at the UN Assembly as if the event was a mere tv show – they shouldn’t have, because the topics were quite serious: The US President flat-out rejected ’the ideology of globalism’, criticized the UN and the WTO for failing to stop countries rigging the rules – from human right violations, ethnic cleansing to illegal trade practices -, and accused Iran of ’sowing chaos, death, and destruction’. (Don’t expect a less active US foreign policy from tomorrow, to put it mildly.) With the usual good sense of timing, the EU announced that it agreed with China and Russia on a mechanism (setting up a ’special purpose vehicle’entity which will facilitate payments) to go around US sanctions on Iran and allow European companies to trade with the country. (As discussed before, this initiative will have enormous long-term geopolitical consequences, but in the short term, I doubt it will work: Even if the scheme is technically working, will Daimler, Total or even the European Investment Bank, for example, risk a US retaliation as long as Trump is the President? And National Security Adviser John ’Bomber’ Bolton reacted quite fast: ’We do not intend to allow our sanctions to be evaded by Europe or anybody else’.).

 

Have a nice day,

Mihály

 

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