Market update: The Fed gives up, markets are pleased, Dollar weakens

31 Jan

by Mihály Tatár

 

Good Morning!

 

  • The Fed’s message hasn’t been so clear for a very long time: It promised patience on future interest-rate increases and ’flexibility’ on reducing its titanic 4 trillion USD balance sheet accumulated during the years of quantitative easing. In plain English: Shocked by the collapsing markets last year and fearing deflation, and under heavy pressure from Trump to not to kill the economy, the Fed capitulated. (For several years, the Fed models and its ideological economists forecasted rising inflation due to higher employment. It never happened, and by now the worry is a self-induced recession on top of a global weakness imported from China. Traders joke ’Powell, you are not fired’’ and ’Trump VS Very Serious Independent Central Bank, 2:0’.) Needless to say, markets were very pleased (SPX +1.55%, Nasdaq +2.20%, Nikkei +1.01%, Shanghai +0.91%, Copper +2%, Aluminium +2.3%, WTI 54.60, Brent 62.20 USD – with oil prices also helped by the wild stories coming out from Venezuela, from violent street protests to a Russian jet shipping out gold reserves to President Madura claiming Trump had given the order to Columbia to kill him). As forecasted, traders got the message that a strong Dollar is not an interest, and the USD weakened (EURUSD 1.1510, USDHUF 274.50, USDPLN 3.724), lifting risk-on currencies (EURHUF dropped to 315.60, near the key level mentioned earlier, even the Turksh Lira advanced to 5.21 against the Dollar). Note that the dovish Fed will now be fully priced in, and the only remaining theme to buy on is the US-China deal. (And if that is done, or fails, we are back to square one: overpriced assets with all the good news priced in.)

 

  • Telegraph’s Ambrose Evans-Pritchard argues that despite the focus on the UK being in trouble, the EU is barely in a better position: Economic growth in the Eurozone dropped to stall speed  (Italy is now in recession, German and French industrial output is contracting rapidly despite the super weak Euro), all natural consequences of the rigid clinging to the mercantilist trade model – making Europe vulnerable to the Chinese slowdown – and the religious government non-spending enforced by Germany at a time when the cost of money in Europe is at a historical record low. Ambrose also notes that politically, the EU is not in a shape to survive another 2011-2012 style recession. (And by the way, what could the ECB do then? Interest rates are already at -0.40%.). Personally I would only add that such a crisis would be the final straw in the long history of EU failures (can you remember any big victory from the last 10-20 years? I mean, apart from carpet bombing the continent with regulations from Mifid to GDPR? Because everyone remembers 2015.), and will hopefully  result in reforms and change of attitude and leadership that are badly needed. (Ambrose, of course, probably hopes the EU will desintegrate, making the sheer disfunctionality of the UK political system look less painful.)

 

 

Have a nice day,

Mihály

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