Market update: GBP hammered as hard Brexit preparations begin, better-then-feared US data helps sentiment after ECB disappointment

by Mihály Tatár

Good Morning!

• Despite the huge disappointment at the ECB meeting – going against the sky-high trader expectations, Draghi didn’t actually do anything, altough he did signal a package of fresh stimulus for September, talking about a ’worse and worse’ Eurozone economy  – the sentiment recovered quickly: The US growth data turned out ot be much better than feared (2.1% Q/Q, with personal consumption expanding by 4.3%, this compares with the Eurozone’s expected 0.3% growth, –  but hey, no government spending support is needed at all, as German Finance Minister Olaf Scholz made clear, ’we are not in a situation that makes it necessary or wise to act as if we were in a crisis’ – uh, clearly it never dawned on this politician that a crisis starts with a problem that is ignored. As a growing number of analysts note, in the Eurozone, there is absolutely no problem with too little credit, meaning, the ECB itself can do little to help economic activity even if it were to cut interest rates to -1%, destroying savers and would-be pensioners). The market attention turned to Wednesday’s Fed rate decision, with optimists expecting a Fed that is not so patient as the ECB (SPX +0.74%, Nasdaq +1.11% – both fresh record highs, of course, DAX +0.47%, Shanghai -0.24% – underperforming as a second Chinese bank, Bank of Jinzhou, had to be bailed out, and making matter worse, the bailout was made by forcing state-owned asset managers of ICBC, Cinda and Great Wall to purchase a stake in the failed lender), minimally expecting a 25 basis rate cut and a strong commitment for further easing if necessary. Naturally, the Dollar erased the post-ECB losses after the US GDP data (EURUSD 1.1120, sieging the key 1.11 level  – it also helped that Larry Kudlow ruled out a currency intervention to weaken the Dollar – but note that the strong Dollar issue is hardly over, and Trump’s tweeted that ’I didn’t say I am not going to do something on the exchange rate’. ) Needless to say, the Great British Peso was hammered to a two-year-low (GBPUSD 1.2360, approaching the post-referendum low around 1.21), as the Johnson-government began hard Brexit preparations in earnest, including a 6.5 billion USD war chest to mitigate the chaos after October. (Somewhat funnily, both the media and the British government is talking about the no-deal Brexit as ’it is now a real prospect’. Which is implicitly admitting that the May government was never for a second serious about it, and while lying about this day and night, she simply agreed to what Brussels demanded. ’A great person in an impossible situation’ indeed.) Regional currencies did not enjoy the ECB’s inaction and their central banks talking about easing inflation (EURHUF 327, EURPLN 3.2720, EURCZK 25.63) – the one million Dollar question for the market remains when and to what extent will the Eurozone slowdown reach the region.

• In another strong confirmation of Dalrock’s law (’The more obvious the fact one is in denial of, the more ridicoulus the counterargument will be’), and what will certainly only increase the tension between the US and Germany, German think-tanks and politicians began to rationalize the impossible: As Annagret Kramp-Karrenbauer took over as defense minister, she announced that ’Germany would hold fast to the goal of increasing the country’s defense spending to 2% of the economic output’ – the NATO minimum and what Merkel promised again in 2014 – altough, by 2024, Germany would only increase spending to 1.5%. In a healthy environment, this would be a scandal, but note that instead, rationalizations are popping up like mushrooms (’in constant 2015 prices, the spending is already 0.18% higher’, ’Trump’s provocations are the reason’, and finally, ’Germany should openly drop the spending goal as it is’ – as if the outside world didn’t notice the last two decades of redirecting defense spending to the welfare state.) Note that the very same people are telling us that the EU army and the EU next-generation airplanes are on their way – good luck for gas drillers around Cyprus and the African countries urgently needing peacekeeping missions.

Have a nice week,

Mihály

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