Market update: Optimism fizzles out as Fed backtracks and Iran seizes UK tanker, EU at crossroads

by Mihály Tatár

Good Morning!

• The optimism fizzled out by the end of the week, as James Bullard – the most dovish Fed policy maker – downplayed the possibility of an aggressive easing cycle, there were no real developments in the US-China trade talks, and, of course, with Iran seizing the UK oil tanker Stena Impero (SPX -0.62%, Nasdaq -0.74%, Nikkei -0.42%, Hang Seng -0.77%). Safe haven currencies, naturally, rallied (EURUSD 1.1215, EURCHF 1.1010) – the Dollar was also helped by traders waiting for this Thursday’s ECB meeting with very high expectations on easing commitments -, and oil prices were bid (WTI 56.20,  Brent 63.50 USD), despite the media reports that tankers were offloading millions and millions of barrels of Iranian oil into Chinese storage tanks, with the potential of pressuring oil prices when used later. (Note that geopolitically, the storming of the British tanker creates an unprecedented situation: The UK leadership of Theresa May managed to humiliate itself within 24 hours – first it was talking about ’serious consequences’ and then very quickly about ’the need of de-escalating the situation’, which doesn’t bode well for the future of peaceful global shipping. Just imagine what Thatcher had done by now. Germany and France, which worked so hard to protect Iran from the US sanctions, realized the impossibility of their position and started to backtrack, condemning Teheran – good luck with the new payment vehicle and all the stuff – and expressing ’solidarity’ with the UK. /Where is the EU army? The UK is still an EU member./ And from Washington, the silence was screaming, clearly this crisis was not expected after the diplomatic good news last week  – altough, as analysts point out, somebody evaporated an entire Iranian militia base in Iraq in a drone attack on Friday, a first action of its kind, which was maybe a message.)

• Regional currencies gave back some of the gains but generally remained quiet (EURCZK 25.54, EURPLN 4.253, EURHUF 325.25), but while all the attention was on what Draghi can or can not do before he leaves (cutting rates again? for what end? buy bonds? maybe Italian bonds? that’s Lagarde’s job), there were two much more important developments: 1. The EU’s publicly almost unknown, but powerful puppet-master, Martin Selmayr, left, leaving a huge wide hole in the EU machinery. (This never-elected official was the godfather in Brussels, without his approval nothing could happen, let it be a position on Brexit, handling the Greek debt crisis or even setting mobile operator roaming fees. He was the main ’example target’ of Nigel Farage during the Brexit campaign, by the way, where, you know, Remain supposedly lost because young people didn’t vote. One can only guess what happened – maybe Ursula von der Leyen didn’t want such a powerful person near her, or maybe, he was just given a new job we don’t yet know about.)  2. EU officials leaked their plan regarding the US-EU trade conflict, and it doesn’t sound good at all: Trump will surely not risk the 2020 election by starting another trade war front (?), so let’s play for time and slow down the current talks as much as possible, giving unimportant concessions here and there. In 2020 there should be a ’reset in trans-Atlantic relations’, meaning, he will surely lose. (No comment really. Prepare for the worst. If you thought Brexit was a mess, you haven’t seen anything yet.)

Have a nice week,

Mihály

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