Market update: Dovish intervention from the Fed leads to violent rally, US military leadership leaving

7 Jan

by Mihály Tatár

 

Good Morning!

 

  • The sentiment was already better with high US – China trade talk expectations when Powell suddenly tried to soothe investor nerves by saying that the Fed is flexible, and is ’listening carefully’ to financial markets – essentially hinting a pause in tightening. This, coupled with a monster US jobs data – 312.000 jobs created in December with earnings rising 3.2% Y/Y, a strange way to start a hard recession, as discussed here earlier – and an anxious looking Chinese rate cut, started a violent short squeeze (SPX +3.43%, Nasdaq +4.26%, DAX +3.37%, Nikkei +2.64%, Shanghai +0.50%, US 10Y yield turning around to 2.66%). Naturally, the Dollar weakened and risk currencies strengthened (EURUSD 1.1430, GBPUSD 1.2750 even as Theresa May warned of ’uncharted territory’, with a straight face, in case her Brexit deal doesn’t pass in the Parliament, EURHUF 321, USDHUF 281, EURPLN 4.29, USDPLN 3.76), and commodities rallied (WTI 48.70, Brent 57.80 USD, Copper +3.2%). Note that what we see now is a typical wild bear market rally flushing out ill-timed positions: I suspect nobody seriously believes that the clash of the US and China will be fully resolved by late March (Trump’s deadline, by when he threatened with more tariffs), and I don’t consider a good news either that that the moment the Fed tries to decrease the historically unprecedented liquidity it created, financial assets plunge like there was no real economy. (Meaning, Powell’s  remarks aren’t that inspiring from investor perspective for the long term.) The same goes for commodities – I doubt a Chinese recession can be averted at this point, and Bloomberg notes that in Germany, the world’s fourth-largest economy, renewable energy has become the primary source of electricity (40% vs 20%) in 2018, which doesn’t exactly look well for oil bulls who consider the end of last year as an accident.

 

  • While President Trump threatened to use his national emergency powers to build the wall, possibly using the large sums flowing in from trade tariffs (guessing from the Democrat and media reaction, they didn’t see this coming), and called for more legal immigrants (!) to increase America’s talent pool (barely covered in the mainstream media) – given that only 7% of US students graduate in engineering compared with 30% in China – , the infighting intensified on the Democrats’ side: Former Vice President Joe Biden announced himself as the only and best person to beat Donald Trump – he is supposedly very popular among rust belt workers – only to find himself fiercly attacked for being ’too old, too white, too male’. (I guess the revolution is now eating its own children.) On the other hand, however, rising star (young, female and minority) Ocasio-Cortez also made an angry storm against herself when doubling down on her ’New Green Deal’ initiative and suggested the wealthy should pay a 60-70% tax rate (!) to fund the programme. (Let’s just say her political skills need to be honed before becoming President.) In the meantime, all the loyalists of former Secretary of Defense Mattis are resigning (the latest person to do so was the Pentagon Chief of Staff), and now we will soon see how Trump is really managing geopolitics (together with former tank commander and CIA head Mike Pompeo): Personally I expect a much more unpredictable, fast-paced, and sometimes nasty foreign policy, with post-Cold War sensitivites and informal rules ignored bluntly. (Or to put it another way, leveling the playing field with Beijing and Moscow.)

 

 

Have a nice week,

Mihály

 

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