Market update: ‘Shallow’ deal hopes keep investors optimistic, Samsung the latest to disappoint

8 Jan

by Mihály Tatár

 

Good Morning!

 

  • In the optimistic sentiment, markets traded higher or performed modest profit-taking (SPX +0.70%, Nasdaq +1.26% – a great opportunity for your average portfolio manager, who sleepwalked into a 10% loss in 2018, to buy again, DAX -0.18%, MIB +0.65%, Nikkei +1.09%, Shanghai -0.36%, WTI 58.50, Brent 57.30 USD, Gold declining to 1280 USD, EURUSD 1.1480). Traders focused on the positive trade negotiation noises coming from both Washington and Beijing – the Chinese were also busy buying soybeans to signal goodwill – , with most analysts arguing that even a ’shallow deal’ would result in a cool 2019 for investors. (Personally I would expect a shallow rally on a shallow deal – note that this trade conflict is deadly serious and existential interests are clashing. When commerce chief Willbur Ross bragged about how strong the US position is because China is dependent on high-tech imports, Huawei suddenly unveiled a new, ’highest-performance-in-the-industry’ chipset and Beijing began to talk about expanding its fleet to 10 aircraft carriers. If the a deal here is not a comprehensive compromise, its just a truce for a few months. In the meantime, Samsung Electronics announced a huge earnings miss  (-20%), a further sign of global trade slowdown.) In a major change from 2018 trading themes, bond traders – realizing the new, dovish Fed situation – were busy purchasing emerging market Dollar bonds from Serbia to the Phillipines, and generally, the talk is that non-lethally-indebted emerging economies may now get some breathing room. (This remains to be seen, the 3M Libor is still as high as 2.80%. It is one thing to service debt at a GDP growth of 5%-6%-7% and entirely different at 2%-3%. Only a much weaker Dollar would help.)

 

  • While President Trump announced a TV address for today (if its about building the wall, Democrats, who spent a vast amount of political capital into stopping it (’resist’), are up for a huge humiliation, just sayin’), in a somewhat shocking development, the mainstream came in to protect Alexandria Ocasio-Cortez now famous ’70% tax on the wealthy’ proposal. (To be exact, a 70% marginal tax rate on income of more than 10 million USD a year, to fund fossil-fuel energy elimination projects.) Left-leaning economists were reassuring us as that the plan is not radical (hey! you had a 73% tax rate in 1920 you know!), and Paul Krugman – who else, you know the guy who forecasted an immediate global collapse after the 2016 elections – analyzed that the plan would ’be unlikely to cause much damage to the economy’. Well, I am sure. (The Romanian stock exchange dropped 20% on a single bank tax news two weeks ago and even in the EU, the smallest tax differences between countries create huge tensions.) This steady shift towards socialist ideas – remember Obamacare and the endless proposals for free healthcare in a country of 325 million – is all the more interesting and alarming because at the same time rising countries like Brazil and India move to the exactly opposite direction. (The 2020 elections will be quite fateful in this regard. One has to wonder what will happen in stock markets and pension plans if somebody with such an agenda wins – and by the way, by then, China will be one-third of the MSCI Emerging Market Index by itself.)

 

Have a nice day,

Mihály
 

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