Market update: Bounce doesn’t last long as Trump hits Mexico with tariffs, Chinese data spirals lower

31 May

by Mihály Tatár

 

Good Morning!

 

  • Oversold stock markets, with huge effort, eked out a bounce on Thursday (SPX +0.21%, Nasdaq +0.27%, DAX +0.54%), only to get hammered by the fresh negative newsflow (SPX futures -0.80%, Nikkei -1.11%, Hang Seng -0.19%): 1. Trump announced a 5% tariff on Mexican goods ’until the country stops immigrants from entering the US illegally’, with the tariffs to rise gradually to 25% until October. (This caused a nice 2.4% drop in the Mexican Peso and reinforced global slowdown fears – the US 10Y yield gapped lower to 2.17% and oil prices plunged, WTI 55.80, Brent 65.90 USD). While personally I am not sure cleaning up the floor with the Mexican government deserves the analysts reaction it got (’disruption of world economy, run for your lives’), note that Trump is in no position to show weakness about immigration and this was also a message to Beijing.  2. That said, this morning’s Chinese data was – who could have thought? – terrible, showing a contracting manufacturing sector (PMI 49.4), flying in the face of economists who keep talking about a relatively robust and ’independent’ Chinese economy. (Yes, the data is messy and hard to interpret – for example, while China’s diesel consumption – seen as ’massage free’ indicator of economic activity –  dropped like a stone, as David Goldman points out, railway traffic increased by 10%. But you really have to be too smart for your own good to ignore that foreign investments have dried up, new non-government projects are frozen and businesses pull back in the uncertainty. Capitalist economies are sensitive economies. If nothing else, the move down in oil prices, despite the   OPEC production cuts and the Iranian/Venezuelan disruption, should make China optimists more wary.) Not helping the sentiment, while China was busy spreading propaganda videos (’epic trade war to the end’), Washington intensified the pressure: The Pentagon leaked a plan to cut US reliance on Chinese rare earth shipments and the US Joint Chief of Staff bluntly announced that ’China broke its promise’ regarding the South China Sea, and urged action. (If anybody yet remembers, President Xi promised to President Obama that China won’t militarize the islands. Journalists were very happy. You know what happened next – the islands now look like fully armed aircraft carriers.) In more positive news, the Turkish Lira strengthened 2.5% (USDTRY 5.88) on the market talk that President Erdogan is retreating in the US-Turkey conflict (the US has threatened to impose sanctions on Turkey if the purchase of the Russian S-400 air defense system, dubbed ’Turkey’s NATO exit’ was completed), and regional currencies had a strong day (EURPLN 4.288, EURHUF 325, EURCZK 25.835) with the topside levels holding well and a hawkish ECB looking more and more improbable.

 

  • In a highly symbolic parallel event, Trump gave a speech to the graduates of the US Air Force Academy, promising more ’America First’ after ’decades of losing’, while at the same time, Merkel also gave a speech at Harvard, telling her audience to ’tear down walls of ignorance and narrow-mindedness, for nothing has to stay as it is’. (The first part is of course her reference to the ’Build the Wall.’ The second part is a bit more problematic – does she mean Germany’s position as an export powerhouse with permanently brutally positive fiscal position, or being protected for free by the US?). Expect the US-EU relationship to get worse, much worse, before it gets better.

 

Have a nice day,

Mihály

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