Market update: German business sentiment the highest since 1991, its Draghi’s great day today

by Mihály Tatár

Good Morning!

• With yields marching higher, and the fateful ECB rate decision day arriving, investors turned more careful and adjusted positions  (SPX -0.47%, DAX -0.46%, MIB -0.81%, EURUSD 1.18, Asia not caring too much, Nikkei +0.17%, Shanghai +0.78%).  The market generally expects that Draghi cuts the monthly bond purcases to 30 billion euros and lets the programme run out in September 2018 – but as we know one never knows with the ECB. (Personally my opinion remains that it is nobody’s interest to see an EURUSD running up to 1.25, and Draghi will try to sell this tapering as the slowest possible.) Otherwise, economic data remained stellar: The German business sentiment (measured by Ifo) jumped to a fresh record high (since 1991!), US new home sales advanced to a 10-year-high and the durable good orders in the US just reached their pre-crisis high. (As mentioned earlier, one has to wonder what potential good news remain after the tax reform passes.)  The main victim of the day was the Turkish Lira, again – after Germany announced it will cut funding to Turkey using its influence in the important development banks KfW, EIB and EBRD – crashing the Turkish currency to 3.80 against the Dollar and to 4.45 against the Euro. (The latter is a 70% depreciation since 2015.)

• Serbia is now in a fiscal surplus for the first time in 12 years (!), after completing the painful austerity programme endorsed by the IMF. As usual with IMF projects, growth dropped to a mere 1.2% (compare this with Germany or Romania), but on the positive side, the government is now finding itself in the sweet dilemma whether to increase public wages, pensions or state investments.

• Analysts and economists remain highly divided and argue in heated debates about the significance of the Gold-backed Chinese oil futures contract, to be launched in the coming months to ’dethrone the Dollar in oil trading’. Sceptics point out that despite the hype, most counterparties will not want anything to do with this contract as it adds in a layer of risks and costs, and anyway, it is meaningless what currency oil is quoted in, as anybody can buy Dollars anyway. My personal opinion is that the truth lies in between: It won’t have dramatic effects for a long time, but eventually it does shift away some trading  from the Dollar to the Yuan, and reduces the Western influence on oil markets further.

• To stabilize the rocky US-Pakistani relations, US Secretary of State Tillerson just paid a visit to Islamabad, talking about ’working together in a positive way’ and adding that ’it is not in anyone’s interest to destabilize the Pakistani government’. (For the latter, the local media accused him of ’behaving like a viceroy’.) In the meantime, the third US aircraft career group arrived to the Pacific (its now the Nimitz, the Reagen and the Roosevelt, with F-35 stealth jets being amassed in Japan – this force is now comparable to the one crushing Saddam’s Iraq in 2003 -), to underline Trump’s position on North Korea when he visits China in November.

Have a nice day,

Mihály

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