Market update: Sentiment hit by US-China trade news, aka reality, EU slashes growth forecasts, technology war starts in earnest

8 Feb

by Mihály Tatár

 

Good Morning!

 

  • The world peace sentiment was suddenly seriously hit when it came out that Trump is unlikely to meet Xi before the March 1 tariff deadline, and, according to economic adviser Larry Kudlow, the two sides ’are still far apart’ in the trade negotations (SPX -0.94%, Nasdaq -1.18%, DAX -2.67%, Nikkei -1.82%). It did not help either that the German industrial production dropped 3.9% Y/Y (in Spain, the industrial output plunged a whopping 6.2%), and that the European Commission aggressively slashed its 2019 growth forecast for the Eurozone (from 1.9% to 1.3%, and Italy’s from 1.2% to 0.2%). (Note that as fashionable these days, the EC blamed the slowing China, leaving out the fact that tax cuts and fiscal stimulus – which keep the US economy happy –  have been forbidden, or that Germany was busy taking revenge on its own car industry for the diesel scandal. What had happened if the ECB interest rate was 2% instead of -0.40% or the Euro had been trading at 1.25 instead of 1.14?) Oil traders, as expected here, began selling as well (WTI 52.10, Brent 61.10 USD), and the money continued to flee into safe bonds (US 10Y yield 2.65%, German 10Y yield 0.11% – note that it was trading at 0.80% even one year ago. German investors must be happy.) Surprising no-one, Theresa May was sent away from Brussels empty-handed – as some traders cynically observed, this might have been her plan all along – and the market was more puzzled by a large drop in Libor rates: The 3M Libor dropped to 2.697%, the largest move in 10 years. (It’s not the direction that is surprising – the Fed turned dovish – its more the timing and the how. Note that this is actually good news: Financial executives from Turkey and Pakistan to Chinese bankers probably feel their blood pressure dropping right now.)

 

  • In a far-reaching development, the US pushed to actually ban Chinese telecom equipment (=Huawei) from US wireless networks, and furthermore, showing that it is deadly serious just as in the case of Iran, it told the EU that it should do the same or risk US countermeasures. This issue is of course further increasing the tensions between the two sides of the Atlantic, as Berlin (and several other countries, including Italy and most of Eastern Europe) have no intention to comply. (Altough it doesn’t help their position that the EU is just planning to introduce a vast number of laws against countries and companies  involved in cyber-espionage and intellectual property theft, and trust me, the suspect is not Nokia. In my very personal opinion, the entire issue is a single symptom of a much larger crisis. Brussels is already used to being monitored by Anglo-Saxon intelligence services, they probably don’t know anything worth knowing in advance anyway. The real issue here is who dominates high-tech: For example, the EU badly wants its own stealth fighter jet (being about 20 years late to the US’s F-22 and F-35). With the usual big mouth, the development project was announced, and Spain promised, wait, 25 million euros. For comparison, a single piece of F-35 costs 80 million USD and the entire development program sucked in about 1 trillion USD. Don’t be surprised if the EU had to purchase Chinese aircrafts ten years from now.)

 

 

Have a nice day,

Mihály
 

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