Market update: Brutal drop in stocks globally, Trump calls the Fed crazy, Russia is said to be in Libya

by Mihály Tatár

Good Morning!

• As expected, the correction didn’t last long and markets have sent a powerful reminder what happens when everyone is long and wrong: Stock markets dropped globally in a brutal sell-off (SPX -3.29%, Nasdaq -4.08%, ’every fund manager and their grandmother have it’ Apple -5%, Amazon -6%, DAX -2.21%, Italy -1.71%, Warsaw -1.85%, Nikkei -3.91%, ’the worst is already over’ Shanghai another -4%), weighing down everything from commodities (Copper -3%, WTI 72, Brent 81.70 USD) to cryptos (Bitcoin -6%). Somewhat ironically, US bonds – the immediate source of market fears – actually strengthened after an initial sell-off, with the safe haven money flowing in (US 10Y yield 3.15%) and Trump calling the Fed ’crazy’, and ’making a mistake’ by being raising rates and talking hawkishly. (Phantastically, a lot of market commentators tend to agree with him. Personally, I would point out that this super old rally started in 2009, and priced stocks to perfection, helped by globally easing central banks and confirmed by extremely strong growth. The former is now gone. What else should the Fed do? Keeping rates low here would actually mean calling post-war economic theory nuts and rebooting with a totally different central bank ideology. Also, today’s investors tend to be very lazy: Even the Bloomberg editorial tells us that ’traders say bad day was overdue in stocks, not a reason to panic’. This ’don’t panic’ is of course a favorite movie joke and is a very bad sign – I stay at my January prediction that ’the rally breaks this year but with a lot of yoyo movements’. ) Currency markets were clearly at odds on what to trade under the circumstances – the Euro continued its upward correction (EURUSD 1.1560) on the closing out of carry trades, the save-haven Yen strengthened (JPY 112), risk-sensitive regional currencies as usual weakened (EURPLN 4.32, EURHUF 326, EURCZK 25.88), but the extend of the moves was hardly dramatic and note that Swiss Franc (EURCHF 1.14) and Gold (1190 USD) barely moved, hinting that what we see is a tough repricing phase rather than a fear of systematic collapse 2008’ style.

• Strategists note that while the EU loves to give lectures about the unconditional greatness of free trade (always rich given its agriculture policy, but never mind), by now even is Brussels is taken aback by the rapid Chinese expansion along the Silk Roads towards Europe: Transport and infrastucture giants China Ocean Shipping Company (COSCO) and China Merchants Port Holdings have acquired stakes in 13 European ports from Rotterdam to Piraeus, direct rail links are established with Chinese factories and as always, a web of Chinese-only companies arrive with them. (In six years, the port traffic in Piraeus grew over 300% – this is great news until you realise that the Chinese ports in Djibouti, Sri Lanka and Pakistan are already quasi Chinese naval bases with PLA warships always present). This issue has become so critical by now that even France’s Macron announced that ’roads cannot be those of a new hegemony’ and ’cannot be one-way’, with Merkel also calling for ’more reciprocity’. (I guess its never too late. Why not admit it and say Europe First? Just joking.)  In the meantime, Israeli PM Netanyahu promised Greece and Cyprus that Trump will keep the pressure on Turkey – note that these three countries now count as Turkey’s main enemies, with Greece and Cyprus being especially worried about a sudden Turkish military move against their gas exploration in the Eastern Mediterranean -, and according to unconfirmed leaks Russia has established two bases in Libya full of special forces and missile batteries. (If true, that would be  a complete humiliation of Western powers – again -, not just from the oil but also from the control-of-the-refugees angle.)

Have a nice day,

Mihály

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