Market update: Stocks manage a bounce but tech disappoints, China blinks, EURUSD under 1.14

26 Oct

by Mihály Tatár

 

Good Morning!

 

  • Stock markets finally managed a bounce on Thursday (SPX +1.86%, retesting the key 2700 level, Nasdaq +2.95%, DAX +1.03%, Italy +1.78%), but the excitement fizzled out quickly after the disappointing numbers from Amazon and Alphabet (Nikkei -0.04%, Shanghai -1%, Alphabet /Google/ -3.9%, Amazon -9% – auch). It’s worth noting that the widely anticipated US economic slowdown is yet to be seen (durable goods orders increased by a healthy 0.8% in September), the real estate market, however, is clearly going down (pending home sales -3.4% Y/Y after August’s -2.6%), which is a painful reminder for everyone – the 2007 bear market started the same way.  (It will be interesting to see what will happen in Europe when interest rates go up – maybe you do know other countries where the zero rate central bank bank policy created huge real estate bubbles.) At the ECB meeting, Draghi announced no change to the plan (first rate hike in the second half of 2019, growth remains excellent altough a tad slower, don’t you worry), but the market was more pessimistic and especially didn’t appreciate the lecturing of Italy and ruling out any ECB involvement (EURUSD 1.1360 – we are now very close to the 1.13 Trumpvention level, Merkel better doesn’t switch off her phone, EURHUF 324.40, EURPLN 4.314). For the record, both sides are somewhat justified in some respect – Italy indeed avoided serious reforms and didn’t change its debt management habits since entering the Eurozone. However, it is also true what the League is saying, namely, that the rules of the Eurozone and the too strong Euro are killing the Italian economy to begin with – and that the Italian government does have the democratic mandate to ignite growth, while nobody ever voted for Mario Draghi (or the Maastricht Treaty for that matter).  One can only hope that the giant game of chichen (Brussels and the ECB threatening Italy with financial collapse, while Rome – so far implicitly but in the future explicitly – threatening to bring down the euro) will eventually result in a grand compromise (Italy becomes a good boy again in return of a Marshall-plan style bailout or EU funds buying Italian debt. I know, I know, Greece, Portugal and Spain will be furious and demand similar treatment). This almost tragic difference of viewpoints can also be seen at the Brexit-negotiations (GBPUSD 1.28 – they broke down again on internal arguments in May’s team facing a totally unflexible EU position), where the European left-leaning media began talking about Britain in a tone usually only reserved for Donald Trump (’Watching a country make a fool of itself’, ’When Theresa May shows up in Brussels with yet another proposal, you can be sure that its not worth the paper it is printed on’). (I would be the last person to defend the weak and incompetent May and her Remain-at-heart specialists, but hello, why exactly are they so confident this will end well for the EU? The are no Belgian battleships in Asian waters if I count correctly. Also, everyone seems to have forgotten that before the fateful Brexit referendum, David Cameron travelled to Brussels to ask for symbolic concessions to appease an unhappy British population, only to be refused arrogantly by the EU Commission – that was a huge strategic mistake.)

 

  • While the migration issue dominated political headlines (Trump offered support to Italy’s hard line on illegal immigration and announced to send US troops to the Mexican border against migrant caravans, just as Macron’s France pushed to teach Arabic in public schools), China seems to become wary of the developmens of the trade war: As a gesture, it instructed its state oil companies from Sinopec to CNPC to halt Iranian oil buying, and through soft channels, Beijing signalled its ready to buy whatever the US wanted to sell in order to reduce the trade deficit. (This is not the US’s key demand, but it is certainly a move toward a deal.) Internally, the argument is that the ’Made in China 2025’ plan, which was really the last straw for Washington, can be easily postponed to 2035: After all, by then, it will be the world’s largest economy by far anyway.

 

 

Have a nice day,

Mihály

 

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