Market update: Boris warms up with ‘ultimatum’ to the EU, all eyes on the Fed as Trump increases pressure

by Mihály Tatár

Good Morning!

• Trading slowed down before the fateful Fed rate decision on Wednesday (SPX -0.16%, Nasdaq -0.44%, DAX -0.02%, Hang Seng +0.32%, EURUSD 1.1140, US 10Y yield 2.06%, German 10Y yield -0.39%). For good measure, Trump increased the pressure on the Fed (’The Fed has made all of the wrong moves. A small rate cut is not enough’ (..) ’The EU and China will further lower interest rates and pump money into their systems, making it much easier for their manufacturers to sell product. In the meantime, and with very low inflation, our Fed does nothing – and probably will do very little by comparison’.) Note that we are now in the curious new situation that the US unemployment is at record low, the hard economic data is very healthy, the stock market just made another record high, and yet a rate cut cycle is contemplated, essentially to support investor sentiment amid the trade war and to weaken the Dollar. (A strange new mandate for a central bank. And it’s not just the Fed: Altough the ECB denies it weekly like a politician a secret affair, it does everything possible to avoid an appreciating Euro at a time when the German economic model is in trouble. If factory orders plunge today, imagine them at an EURUSD of 1.40.) In the meantime, nobody exercised mercy on the British Pound (GBPUSD 1.2120, that’s almost -10% since March), and giving a feel of the new game, Boris gave an ’ultimatum’ to the EU: He will only start talks if the EU first agrees to reopen the divorce agreement and to scrap the Irish backstop guarantee. (As a sidenote, the word ’ultimatum’ is used by the media – it is actually a strange way to describe a request for a better deal by one of the equal parties, especially if the deal wasn’t ratified yet. But nevermind. Just to make sure of pushing the right buttons, Johnson talked about the great potential of the UK selling unlimited farm products to the world after leaving the EU Agricultural Policy – and be assured this was only the beginning. Yes, I know, Brussels must play tough now, but optically, showing zero flexibility will look very clusmy after some time. Like, when Beijing sits down with the UK for some nice trade talks and the usual EU pressure groups won’t be invited.)  Facing the no-action-for-now ECB and the horror-show Eurozone data, regional currencies had another rough day (EURHUF 328, approaching the politically sensitive 330 level, EURPLN 4.2880, EURCZK 25.654).

• Flying under the European media’s radar for the obvious reasons, Democrat presidential candidate Elizabeth Warren just announced a wide-ranging plan to overhaul US trade relationships: Countries must meet certain preconditions for any trade agreement, and the existing ones are to be renegotiated. (Needless to say, the exact preconditions are left vague, but they include: labor rights, human rights, verified plans to reduce emmissions and eliminating domestic subsidies. Auch.) This is not only interesting because Democrats tell their base 24/7 that Trump is evil in attacking free trade, but also because the ’preconditions’ will result in a clash with exactly the same trade rivals (China, India, EU). From the looks of it, apart from Joe Biden (whose son’s very, very lucrative China business is already uncomfortable and is critized constantly by Democratic rivals), nobody is really that much of a fan of the pre-Trump trade situation. (As discussed here before, once the genie is out of the bottle – namely the perception that the US is on the losing end of global trading and its partners are taking advantage of its naivety – things will never be the same.)

Have a nice day,

Mihály

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