Market update: Oversold stocks, currencies bounce, Hungarian inflation accelerates

by Mihály Tatár

Good Morning!

• Markets finally managed to perform a bounce-like action on Tuesday (SPX -0.14%, Nasdaq +0.03%, DAX +0.25%, Italy +1.06%, Warsaw +0.67%, Nikkei +0.01%, but, Shanghai -0.41%), inspired by slipping US yields (10Y yield 3.21%). (After this 5 basis point move lower, analysts were busy telling people why bonds can not crash: Key ingridients, like inflation, are missing you know – this reminds me of 2008, when financial editorials reassured everyone that there won’t be a recession. As I see it, the US is financially already overstretched, it cut taxes big time and just wants to start with infrastructure spending, while China is in trouble and won’t be able to buy as many US bonds as before. Barring a sudden economic crash or war, where could yields possibly go?) The bounce reached currency markets as well, with the Euro jumping from 1.1430 to 1.1510 against the Dollar (as widely expected, Trump was not happy and critized the Fed again, altough he also added that ’I like to stay uninvolved’. One has to wonder what would happen at 1.10 – will he fire the Fed leadership and send them to be embassadors to Iran? Technically speaking, the 1.1350-1.1450 zone is a very strong support, but apart from maybe a Brexit-deal relief rally or future positive comments from the ECB that it doesn’t let the Italian conflict turn into a disaster, there is nothing positive going on for the Euro. Tellingly, European banks lost almost 30% since March – remember, we are supposedly way past behind the Eurozone crisis and in the middle of a great upswing.) The Pound had a good day, too (GBPUSD 1.3160), with positive noises coming out from the Brexit negotations – the EU seems to be helping May to survive again, the talk is that the UK is to remain temporarily in the EU’s customs regime and that the Irish border isse will be solved by symbolic measures. (What a Brexit!) Regional currencies relaxed a bit as well (EURHUF 324.60, EURPLN 4.304), caring little for now about the Hungarian inflation accelerating to 3.6% Y/Y (!), the fastest in five years. (Note that the Hungarian 10Y yield is at 3.90%. Inflation is 3.6%. Not much real yield here to put it mildly, and energy prices barely started to show up in input prices. The EURHUF is already at 324 with most stock markets – risk sentiment – near their record high. Just sayin’.) Even the Turkish Lira strengthened somewhat (USDTRY 6.08), altough the major development there is that the Finance Ministry announced a ’full-scale fight against inflation’, meaning price controls, for now on a ’voluntary basis’ (corporates, retailers better cut prices by 10%  and banks should decrease interest rates. This shows the extent of the crisis underway, and a frustrated Erdogan warned the EU that it ’hasn’t lived up to its financial pledge on refugees’). Oil prices rallied as well (WTI 74.70, Brent 84.80 USD), attributed to Hurricane Michael in the US but I suspect traders were jumping on the less-tough-than-expected Trump message (’I want more energy, because I don’t like 74 USD’).

• Veteran strategist David Goldman warns that the threat of a global Dollar crunch – a big worry in 2017 but totally forgotten by 2018 – remains a real risk and   USD over-indebted companies and governments may experience a hell-like 2019. The steady rise of USD rates (the 12M Libor is now 2.96%), yields and the very expensive EURUSD basis swap makes refinancing Dollar obligations very painful – its no wonder that European banks, which have to refinance 12 trillion USD (!) of borrowings – are dying to get Dollar deposits these days. (Of course, before they would go under, European governments will step in and start forceful recapitalizations, shotgun mergers and may even ask for Fed help – but not everyone will be so lucky.)

• As New York’s Democrat mayor signed the third gender (’X’) into law while the Chinese were busy perfecting their next generation submarine-hunting satellite laser and deporting Uighurs, more and more US newspapers quietly admit there is no evidence for a Trump-Russia election collusion. (Ups, excuse me, after two years have passed?! – This is also a negative for markets in way, where will be the ’wall of worry’ with the constant media excitement over an impeachment? And where is Robert Mueller, by the way?).

Have a nice day,

Mihály

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