Market update: Sentiment bounces on trade war hopes, China cutting car tax, Merkel retreats

30 Oct

by Mihály Tatár

 

Good Morning!

 

  • An eventful trading started the week on Monday: European stocks rallied (DAX +1.20%, MIB +1.91%, Warsaw +0.48%), partly on Merkel resigning from being the head of CDU – but oddly enough, trying to stay Chancellor until 2021, even tough she herself declared that ’the image presented by the government is unacceptable’ and having argued for decades that the party head must be the same person as the Chancellor – and partly on China considering cutting the car purchase tax to half to bail out collapsing car sales (Volkswagen +4%, Daimler +2%, BMW +2%). The US trading started with huge losses with Washington threatening with additional sanctions on Chinese imports in case China doesn’t bend, but later the mood recovered with Trump talking optimistically about a ’great deal’ to be made, and Beijing making another gesture by telling Bank of Kunlun, the key bank in trading with Iran, to halt handling payments  (SPX -0.66%, Nasdaq -1.63%, Nikkei +1.48%, Shanghai +1.67%). In the better sentiment, money was flowing out of safe havens (US 10Y yield 3.10%, Gold 1.226 USD, EURCHF 1.14, USDJPY 112.70), with Euro traders not sure how to trade the Merkel-news (EURUSD 1.1380, EURHUF 324.80, EURPLN 4.33, EURCZK 25.88), as the mainstream media and France’s Macron celebrated the ’victory of European values’ – in fact, Merkel has planned this tactical retreat as early as July, knowing full well that not many dare to replace her after the one-way bets she made for Germany. (Not unsimilarly to Britain’s Theresa May.) It’s worth noting that Italian banks and bonds also rose (Unicredit +4.4%, Italian 10Y yield down to 3.34%), attributed to S&P not downgrading Italy for now, but just as importantly, traders noticed that the Italian government is now busy making serious plans on how to avoid a bank sector collapse, and experts at the Bundesbank (!) proposed ’national solidary bonds’ to cover half of Italy’s 2.3 trillion EUR debt, funded by a mandatory wealth tax of 20% and the Eurozone bailout-fund ESM. (Naturally League politicians angrily dismissed the idea – it would be a political suicide not to mention Italian wealth is not held in liquid assets, and even announcing such a tax would cause a market collapse – , but these developments show that there are now serious discussions underway in the EU on how to solve the Italian crisis. The person of the German Chancellor will be key in this regard (altough, unfortunatelly, one has to wonder that if Germany is so divided in such a powerful economic upswing what will happen in less good times. Also, Rome would probably need a more risk-averse, less opportunistic politician than Merkel has been, to be able to compromise, as nobody in the Italian government coalition forgot what happened to Greece.)

 

Have a nice day,

Mihály

 

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