Market update: Traders await the Chinese retaliation, Fed rate cut debated, German energy policy called a complete failure

21 May

by Mihály Tatár

 

Good Morning!

 

  • The implications of the Huawei-ban remained of course the main trading theme on Monday (SPX -0.67%, Nasdaq -1.46%, DAX -1.61%, Nikkei -0.10%, Shanghai, helped by a huge liquidity injection, +1.80%), with semiconductors and anything chip or China-related being sold off (Nvidia -3%, Micron Technology -4%, Xilinx -3.5%, Google -2%, Apple -3%.) The rare winners were the Huawei-rivals (Samsung +4%, Ericcson +1.7%, Nokia +1.7%), but strategists remained very pessimistic, warning that the US-China trade war ’is in danger of assuming Brexit-like characteristics’. (Which is a fundamentally flawed logic, by the way: Trump was in essence elected for what he is doing now, while Brexit was made a mess by politicians who were remainers to begin with.) Many were also fearing and out-of-hand China retaliation, as the Chinese media was debating ’how nice it would be’ to ban rare earth exports to the US, for example. Note that currently the market prices a Fed rate cut in December with 75% probability – this is a very unusual situation, because the US growth is solid and Powell sounds very comfortable with the economy – so we only have three options here: 1. Either the market is irrationally nervous when expecting a complete US slowdown in the second half  2. The market is right and the Fed will have to act  3. Trump will win again in the Washington – Fed conflict and the Fed will cut again whatever the degree of the slowdown. (If nothing else, the Dollar will push Trump to act: with EURUSD at 1.1150 and the Dollar getting stronger and stronger globally, it’s hard to create an export paradise.) In the meantime, oil prices remained supported even amid the growth fears as Iran accelerated the production of enriched uranium (WTI 63.40, Brent 72.20) – it’s worth noting that the new Republican Guard chief General Hossein Salami commented on the Iranian TV that ’the difference between us and them is that they are afraid of war and don’t have the will for it’.  (This came as Trump turned down the Saudi request for a direct US air strike against Yemeni Houthis, who executed Iran’s attack on the two Saudi pumping stations last week. So far the carefully planned missile and drone attacks delivered the message but killed nobody and didn’t sink any ships – one has to wonder what will happen after the first casualties.)

 

  • Just as Merkel’s diplomacy became hiperactive to secure the presidency of the European Commission and / or the ECB (barely waiting for the results and any potential lessons from the EU elections – there is a mood in Germany that this time it’s Germany’s turn, which is understandable from the German perspective, but rings very bad outside, from France to Italy, as who does Berlin think Juncker and Draghi was working for up until now?); the political winds changed and the German media turned up the heat on Merkel’s Energiewende: Even the left-leaning Der Spiegel – hardly a far-right climate sceptic outlet – bluntly announced that the historic 2011 decision to ditch nuclear energy and switch to renewables failed completely. Sucking in at least 160 billion euros of taxpayer money in the last five years, not much actually happened apart from the big talking (hey, this is a progress compared to the EU army!): 1. German CO2 emissions barely decreased in a decade  2. While subsidized wind turbines and solar panels popped up like mushrooms, only 950 kilometers of the needed 7700 kilometers of high-voltage transmission lines were built – specifically in 2017, a mere 30 kilometers  3. Wind companies are in trouble, slashing jobs, with a mere eight new wind turbines installed in Bavaria last year (!) 4. Car and track emissions remain at roughly the same level they were in 1990 (!). There are 47 million passenger cars registered in Germany with an additional 3.4 million being sold each year. Even if half of those new vehicles electric – quite unrealistic – , there would be around only 15 million such vehicles in Germany by the magical 2030 year deadline. 5. Given that 35% of German energy comes from renewables, and nuclear is shut down, you can guess where the rest comes from.

 

Have a nice day,

Mihály

 

If you liked the post, follow Barrelperday on Facebook!

Or subscribe to our Twitter feed or Newsletter

No comments yet

Leave a Reply