Market update: ‘Academic’ Fed generates optimism, diplomacy has a strong day from the Ukraine to the Middle East

by Mihály Tatár

Good Morning!

• Clearly some policymakers in the Fed sensed that the market excitement is fading quickly, and New York Fed chief Williams hit the wires urging that the Fed needs to act quickly, and shouldn’t wait for the economy to turn down. (Later it was clarified that this was ’academic’ and meant no immediate policy, but investors still appreciated the talk: Stocks turned higher, SPX futures +0.33%, DAX futures +0.70%, Nikkei +1.95%, Shanghai +1.28%; commodities bounced –  Copper +2%, WTI 56.10, Brent 63.10, and the Dollar weakened – EURUSD 1.1280, GBPUSD 1.2540 – the latter also helped by 30 remainer conservatives rebelling and passing measures that makes a hard Brexit harder to execute. Naturally, Gold jumped the most – 1450 USD, and regional currencies also strengthened (EURHUF 325.70, EURPLN 4.254, EURCZK 25.52). The market is now somewhat less sure if the Fed will only cut by 25 basis points in July or it will be 50 basis points – personally I don’t think this question is too important, as the real question seems to be: How can the Fed please Trump and weaken the Dollar and ease monetary conditions while looking as if it decided on its own? (The data is just not weak enough. If the ECB is not bluffing, and starts another bond buying programme, weakening the Euro further against the Dollar, the Fed will rightfully look as completely incompetent. One can almost feel that secret working groups of the US Treasury and the Fed are busy at nights investigating how the Dollar could be weakened, legally and technically, and in a way that there is no market panic as a result.)

• While the media concentrated on the evergreen theme of the racist Trump (for telling a hijab-wearing congresswoman, who described 11/September as ’some people did something’, to go home) Thursday was actually a pretty good day for diplomacy: Russia and the Ukraine have agreed to a ’comprehensive’ cease-fire in Donbass (the fighting there has killed 13,000 people since it broke out in 2014, rarely really covered in the European media – altough this deal looks fragile, and nothing is solved yet, the political winds have clearly changed in the positive direction with the steady rise of Zelenskiy); the Foreign Ministers of Israel and Bahrein met and discussed regional issues (this was unthinkable even a few years ago), and Iran made positive noises, promising concessions on its nuclear programme in return for the US lifting sanctions. (This is why oil traders didn’t care too much about the USS Boxer shooting down an Iranian drone yesterday. Note that if Iran eventually agrees to enchanced nuclear inspections, many will ask themselves, why Obama couldn’t push for the same in his ‘phantastic’ deal with Iran, further humiliating the defenders of this trade agreement. It would also be a first step towards an international agreement on the form and reconstruction of post-war Syria.)

Have a nice day,

Mihály

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