Market update: Investors freak out and sell Italy, Dollar strengthens, Chinese exports reject pseudo economics

1 Oct

by Mihály Tatár


Good Morning!


  • The selling of Italy and broader Europe dominated trading on Friday, with investors, shocked by the sudden change in the Italian budget plans, suddenly fearing a clash between Rome and Brussels – knowing well that such a conflict usually invites assisting credit agency downgrades (DAX -1.52%, MIB -3.72%, Unicredit -8.50%, Intesa -10%, with the money fleeing Italian bonds, 10Y yield from 2.85% to 3.15%, into German Bunds, 10Y yield from 0.54% to 0.47%). Optimistic commentators emphasised, as suspected here, that altough the news is bad, Italy’s deficit is at least still under 3%, therefore it is managable – but they miss the real point, which is that mathematically the situation is unsolvable and we are moving towards a political showdown. (As discussed before, the best outcome would be Berlin taking a big breath and making a deal on the Italian debt – some advisers in Merkel’s circles already push for that – , the worst outcome is Italy gradually crushing Eurozone rules, getting free of the debt trap but causing a Eurozone-wide political crisis accompanied by brutal market movements.) The EU already began criticizing Rome – Moscovici, EU Economic Affairs Commissioner describe the plan as ’Italy, which has debt at 132%, chooses expansion and stimulus..’, and that the budget ’doesn’t adhere to the rules’. US stocks weren’t particularly excited (SPX +0.00%, Nasdaq +0.05%), with futures rising on the news that the US and Canada agreed to a trade deal with Mexico – to be renamed from NAFTA to US-Mexico-Canada Agreement, giving US farmers more access to Canadian agriculture markets in return of no tariffs on Canadian car exports. (In any other age and time this would be called a huge trade victory for the US, but of course there is no mention of that in the news.) Traders noted that China’s exports slow rapidly (Manufacturing PMI 50.8 for September – with export orders falling the fastest in over two years), which, given the trade war with the US, is really only surprising for the mainstream media and analysts. (The majority of bank analysts still tell us with a straight face that Chinese GDP will a lose a mere 0.8% from the trade war – this biased self-censorship reminds me of the belief that Hitler is just talking too much but won’t do really anything a century ago, or that Trump can not win because the 100% Hillary-leaning polling firms say so.) Naturally, the Dollar remained the currency of choice (EURUSD 1.16, US 10Y yield 3.07%, Libor 3M 2.40%, 12M 2.92%), with regional currencies doing little  (EURPLN 4.28, EURHUF 323.30, EURCZK 25.77, USDTRY 6.05). The central bank of Pakistan raised rates for the third straight meeting (from 7.5% to 8.5%, probably a further gesture to the IMF in the process of asking for a bailout), and the GBP was pinned to 1.30 against the Dollar with the start of the Conservative Party conference in the UK (’what do we do now?’). (In a fresh demonstration of incompetence, May’s government is proposing an extra stamp duty for foreigners buying UK property – extracting some cash but definetely not helping the already falling real estate market.)


  • According to Russian Foreign Minister Sergey Lavrov, he and President Putin were invited to the US, confirming that despite the noise to the contrary, the White House and Moscow are ready to sit down and improve relations. (In case the generally awaited Blue Wave of Democrats doesn’t arrive in November, this might happen very fast, in my opinion.) In the meantime, South China Sea tensions spiked after the US Navy sailed warships and flew B-52 bombers near the contested islands, accompanied by UK and Japanese military assets, to which the angry China answered by conducting live fire shooting drills in the region. (China, suddenly surprised by the non-passivity of the post-Obama Pentagon, tries to demonstrate to the West and its own population that is is not backing down – the problem is that everyone is already too afraid of Beijing to care. It only needs one shoot-out, intentional or not, to make international shipping and insurance costs explode.)



Have a nice week,



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