Market update: Traders return and sell the uncertainty, stocks and yields drop, USD appreciates

29 May

by Mihály Tatár

 

Good Morning!

 

  • Traders returning from the long weekend wasted no time and sold again (SPX -0.84%, Nasdaq -0.39%, DAX -0.37%, Nikkei -1.21%, Shanghai -0.51%), with Trump’s latest pressure-building comments (’I think they probably wish they made the deal that they had on the table before they tried to renegotiate it’, ’They would like to make a deal. We are not ready to make a deal’, ’tariffs could go up very, very substantially, very easily’) reinforcing the market uncertainty. The biggest movers were bonds the US 10Y yield plunged to 2.24% and the German to -16 basis points – driving home the narrative that a global recession is just around the corner. (But note that contrary to the popular perception, recession expectations and risk aversion drive down bond yields, and not dropping bond yields create recessions. The market sentiment is that the Fed will need to cut by 50 basis points at least if the trade war sentiment keeps hitting business activity. Also, somewhat funnily, the same economists who warned us that Trump creates an avalanche of inflation through tariffs in the US are now suddenly warning that a wave of painful deflation is coming because of the recession.)  Naturally, in this environment the USD strengthened further (EURUSD 1.1160, GBPUSD 1.2660, it seems investors didn’t buy the story that the EU elections results ’weren’t that bad, maybe the EU parliament fractured a bit more’ , USDHUF 293, USDPLN 3.85, USDCZK 23.16), and commodities remained under pressure (WTI 58.50, Brent 69.60 USD, Copper -0.50%). In the meantime, the Hungarian Central Bank’s ’we need more time to assess’ stance yesterday pushed the EURHUF above 327, and we will soon know how much exactly the MNB doesn’t like the pair around 330. (From a trading psychology perspective, they will need to come up with something more serious than a vague tightening hint or a few more ’speed bumps’ en route to 330.)

 

  • As Macron pushed chief Brexit negotiatior Michel Barnier to lead the European Commission (a great Brexit and a great election result has to be rewarded I guess), and Merkel went on to punish party leader and chosen successor Annagret Kramp-Karrenbauer for trying to push her aside (note the narrative is that AKK is pulling down the CDU because she is ’too conservative and can’t reach young voters’, which is bizarre, especially if true), Salvini shot back at the EU and promised that he’ll now devote ’all his energy to change the EU’s old and obsolete rules’. As discussed here earlier, Salvini’s position is much stronger than it used to be when he retreated from a showdown in 2018: If there would be elections today, he would win easily, so that the only blackmail that Brussel still has is the ECB not supporting Italian banks – Unicredit lost 25% since mid-April, Intesa 20% -, which is a dangerous game to play. Salvini’s economic team is already proposing that the ECB purchases to-be-issued Italian infrastructure bonds – and given the historically unprecedented ECB easing and the recession dangers, declining such proposals would have pretty bad optics.

 

 

Have a nice day,

Mihály

 

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