Market update: Investors in bewilderment after tweet storm, the Mentally Weak and the Mentally Unstable clash

by Mihály Tatár

Good Morning!

• The Fed-induced risk rally hit a serious resistance for the first time in the form of the key 2900 level in S&P (SPX -0.03%, Nasdaq -0.01%, Nikkei -0.09%, Shanghai -0.78%, US 10Y 2.13%, Copper-0.33%), and as some investors took profits, the market watched with bewilderment as Trump unleashed a non-stop wave of tweets: He slammed the Fed (’doesn’t have a clue’, ’borrowing costs are too high’ at a ’very low inflation’), announced that ’it’s me right now that’s holding up the deal with China’ until Beijing returns to the terms already negotiated, and for the first time directly criticized the Euro (’Euro and other currencies are devalued against the dollar, putting US firms at a big disadvantage’). (Of course absolutely no surprise here for regular readers – as forecasted, it’s pretty hard to win a trade war and reorient your economy towards exporting if all your competitors systematically devalue their currencies. This issue won’t just go away, and the Eurozone will soon face the unpleasant dilemma of choosing between a tariff war with the US or letting the euro appreciate.) Interestingly, the Euro itself did not move much (EURUSD 1.1330), which can be interpreted either as 1. it doesn’t care until the attack remains a tweet and doesn’t turn into a threat 2. it did move, in the form of the Dollar not strengthening after the conflict with Mexico was resolved. In the meantime, the steady underperformance of oil prices turned into another drop (WTI 52.30, Brent 61.30 USD, note that previously screaming Apple ’suddenly’ found a backup plan to make all US iPhones outside of China if necessary, which reminds one of Heinlein’s remark that ’listen carefully to all the experts telling you why something can not be done, and then do it’). Overbought regional currencies bounced a bit (EURHUF 321.30, EURPLN 4.265, EURCZK 25.63), and USD Libor financing costs kept slipping lower (3M to 2.436%, from 2.82% in January), probably relieving a lot of USD-financed companies and USD-dependent Asian banks.

• One had the feeling the 2020 election campaign somehow unofficially started yesterday with Democrat Joe Biden calling Trump ’an existential threat to America’ and attacking the US President by name 76 times in one speech  – to which Trump retorted that he must be ’mentally weak’, a ’dummy’. (What is important to note is that Biden suddenly U-turned on his previously very pro-China position (’they are not bad folks,   folks, they are not competition for us’), and began talking about ’you bet I am worried about China (..) but if we invest in our people (..), we can outcompete anyone’. As discussed earlier, contrary to the European media narrative that the trade conflict is only a product of Trump – and therefore will quietly go away in 2020 -, the issue is quite popular in the US and several leading Democrats are actually more hawkish than Trump and rather attack him on not being successful enough.

Have a nice day,

Mihály

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