Market update: The bear market rally arrives, Italy blinks, Trump trolls Brexit deal

by Mihály Tatár

Good Morning!

• As discussed yesterday, there were actually good reasons for a bear market rally – expectations for a more dovish Fed, hopes for a Trump-Xi understanding at the G20, a cease fire between Italy and Brussels – , and investors began the buying spree as soon as Monday (SPX +1.55%; Nasdaq +2.06%; DAX +1.45%; Nikkei +0.80%; Shanghai -0.08% – erasing gains, after Trump, for good measure, threatened with tariffs on Iphones and laptops imported from China in case talks fail; oil also bouncing, WTI 51.30, Brent 60.20 USD, even as Saudi Arabia announced its output surpassed a record 11 million barrels per day). The biggest winner of the day were Italian assets, after Salvini suddenly became flexible on the deficit target (MIB +2.77%, Italy 10Y yield dropping from 3.43% to 3.17%, Unicredit +7%), with traders wondering if this just as a tactical retreat to win time before the 2019 EU elections, or there is a deal in the background for Italian banks, or both. (Note also that Salvini can’t be sure who he will have to talk to in Berlin next year, either.) The Pound, however, gave up even its small gains (GBPUSD 1.28 again), after Trump called the UK-EU deal ’a great deal for the EU’ and warned that it threatens a UK-US trade deal (because the UK remains in the customs union). (Do we really need Trump to state the obvious? Just wondering, looking at the media narratives these days.) Many strategists expect the Brexit deal to fail in the UK Parliament (Euroasia Group says its 70%), which would result in a hard Brexit given that the EU ruled out any ’version B’. The Rubel weakened somewhat on the Ukraine tensions (RUB -2% to 66.91, with everybody waiting for the Trump-Putin meeting at the G20), and the conflict also put regional currencies under pressure, so that they skipped the risk rally (EURPLN 4.30, EURHUF 323.80, EURCZK 25.93). (Not helping either was a relatively weak German IFO sentiment index –  pushing the EURUSD to 1.1330).

• Putting corrective rallies aside and looking at the big picture, the vehemently denied slowdown in world trade and in Chinese growth shows up more and more in the data: Shipping rates have fallen on average 30% from their 2018 highs, and suddenly cash-hungry Chinese property developers are facing double-digit bond yields. (But fear not, credit agencies are still generally optimistic.)

• While Europe continues its verbal military buildup (with nothing actually being done since the early 2000s), China is somewhat more serious: Beijing is rapidly building its own satellite navigation system (Beidou, to give a feel, they already launched 18 satellites this year), and now plans to build three more aircraft carriers (expanding the fleet so seven by 2025, not making Asian powers feel comfortable at all). The consequences of Europe’s passivity can also be seen in Africa, where African leaders these days are asking Israel (!) to intervene in the fierce wars against Al-Qaida and ISIS, or at least equip, train and support local armies, bypassing even used-to-be-present France.

Have a nice day,

Mihály

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