Market update: Stocks keep dropping, the ECB and EU warns Italy, German local elections approaching

by Mihály Tatár

Good Morning!

• The non-stop selling continued on Thursday (SPX -2.06%, Nasdaq -1.25%, DAX -1.48%, Warsaw -1.56%, Italy -1.84%, Unicredit -2%), with some normalization by today’s Asian session (Nikkei only -0.30%, Shanghai +1.2%,  S&P futures +1%). Looking at the newsflow (Germany has cut its growth forecast for 2018 from 2.3% to 1.8% and for 2019 from 2.1% to 1.8% citing ‘weaker external environment’ meaning ‘international trade conflicts’; China published a strong export figure – 17% expansion Y/Y, I suspect local statisticians worked day and night to deliver it; the EU and the ECB increased the pressure on Italy – ‘ECB won’t come to Italy rescue unless it gets EU bailout’ and Brussels critized Rome passing the higher government deficit targets), the bounce didn’t arrive because anything has been solved. To put the moves into perspective: From their early January levels, SPX shred 5% – it dropped 7% in a single week after reaching a new record high, this is never a good sign -, DAX is down 15% and Shanghai by 34%. As a personal note, it is interesting that from Donald Trump to Bundesbank President Weidman everyone found it necessary to comment on the latest stock market moves – just try to imagine this close interest even five years ago – politics and markets are now closer to each other than ever before. (Some traders even joke than one more sharp drop in the SPX and Trump sends the Fed packing. Even Salvini talks about the German-Italian bond spread several times each day. Also tellingly, the IMF announced its first female chief economist, Gita Gopinath – the wild celebration that she is a woman is a bit odd in 2018 in my opinion, – what is way more striking about her is that she questions the benefit of flexible exchange rates (!!) and advocates much earlier IMF interventions. This should shock the economist profession to its core and will have consequences going forward.) Currency and bond markets remained less excited (US 10Y yield 3.18%, EURUSD  1.16, GBPUSD 1.32 – showing the uncertainty before the last minute Brexit negotations, analysts are predicting exchange rates ranging from 1.10 to 1.60, nice – , EURHUF 325, EURPLN 4.306, EURCZK 25.80, TRY 5.90 – strengthening further on the – unconfirmed – reports that the arrested US pastor may soon be released, which would imply a deal package with Trump), and oil prices slipped a bit lower (WTI 71.60, Brent 81.10 USD) with traders not liking the risk off sentiment and the OPEC report (foreseeing slightly weaker demand for its crude next year due to rising non-OPEC supply) also not encouriging fresh longs.

• Political analysts warn that the upcoming German elections will be quite worth watching (Bavaria 14/Oct and Hessen 28/Oct), as they cover roughly 25% of the German population, 20% of German GDP and are traditionally CSU and CDU strongholds. (In retrospect, now even the mainstream media calls the 2017 September general elections ’indecisive’ – what a difference a year makes.) To give a feel of the discontent, CSU’s polling collapsed to 33% from the ’normal’ 50% (!), with their more left-leaning voters flocking to the Greens (not the SPD, which also dropped), and the more right-leaning ones to the AfD (10%). It is also worth mentioning that the CSU in Bavaria tried hard to criticize Merkel to gain popularity – this backfired badly, either because most voters still prefer Merkel or because they can not really see a difference in any way.

Have a nice day,

Mihály

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