Market update: Stocks remain under pressure, Italian assets drop after Salvini’s verbal assault

9 Oct

by Mihály Tatár

 

Good Morning!

 

  • The sentiment remained tense (SPX -0.04%, Nasdaq -0.67%, DAX -1.36%, Nikkei -1.27%, Shanghai +0.20% but only after yesterday’s brutal 4% drop – overseas investors dumped 1.4 billion USD worth of Chinese shares, and US Foreign Secretary Mike Pompeo’s meeting with Chinese Foreign Minister Wang Yi was so icy it looked like a Cold War gathering). It didn’t help that Italy’s Salvini perfected its Trumpian attacks (sitting alongside anti-EU Marine Le Pen, he said ’we are against the enemies of Europe – Juncker and Moscovici – shut away in the Brussels bunker.’ ’The politics of austerity impoverished Italy.’ Le Pen added that ’the aim is to win the EU elections next year and work together for a Europe of nations’), clearly preferring a dramatic conflict to squeeze out concessions from the EU. (Whether you agree or not is a worldview question, personally I would only add that Berlin’s longstanding dogmatic worldview, that everyone should have followed the ’disciplined’ Germany and then everything had been fine is now coming back to haunt them. While German engineering is indeed admirable, and indeed the Italian economic culture prefers overspending, we all know the most key element of Germany’s outperformance was the weak Euro, priced at brutal discount to the Deutsche Mark but way stronger than the Italian Lira. And Washington didn’t miss the fact that Germany has almost doubled its exports to the US since 2000, while its imports rose a mere 21% in the same period. This conflict won’t go away either). Naturally, Italian assets sold off big time (Italy 10Y yield 3.62%, stocks -2.5% or -19% since the elections and tellingly -55% since 2007, Unicredit -3.7% or -34% since the elections and -94% (!!) since 2007), with traders now fearing the worst (the conflict between Rome and Brussels gradually going out of hand accompanied by downgrades and financial meltdowns), pushing the EURUSD down to 1.1460. There were no good news from the IMF either, which warned of trade wars and has cut its growth forecast for the first time in two years – the world is to grow 3.7% this year and the next instead of 3.9%. Curiously it didn’t cut US growth (hey, where is the ’with the trade war the US has shot itself in the leg’ mantra), and expects a Chinese mini-slowdown from 6.4% to 6.2%. (As discussed before, the latter is completely irrealistic and an offence to intelligence, but I guess this is how big international organizations work. For 2019, the IMF predicts a growth of 1.9% for Germany, 1.6% for France, 1% for Italy (!), 4.1% for the Slovak Republic, 3% for the Czech Republic, 2.6% for Croatia, 3.4% for Romania, 3.5% for Poland and 3.3% for Hungary. All in all, I don’t see a world in crisis here.)

 

  • Not really surprising anyone, Pakistan officially announced it will seek an IMF bailout (this caused a 3% stock rally and a jump in bond prices), in the tune of an estimated 12 billion. (It was high time – Pakistan’s foreign reserves have plunged 40% in 2018 and the Rupee had to be devalued four times within a year. The real issue here is whether the US will allow a normal bailout process here or at what political price – Mike Pompeo already warned that the Khan government servicing its gigantic 60 billion USD Chinese loans from IMF money is a no-go – and this 12 billion USD is actually a very low number compared to the issues faced: It would mean a fresh bailout every other year from now with a very low chance of repayment. Also, one has to wonder that if the IMF conditions turn out to be too strict, the new government choses the rage of the population or retreats towards a deal with China.)

 

 

Have a nice day,

Mihály

 

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