Market update: Stocks, yields, commodites drop as Trump ends trace truce, Democrat hardliners and moderates clash

by Mihály Tatár

Good Morning!

• Not only was the Fed not dovish enough (the 25 basis points cut it delivered was the minimum the market expected, and Powell didn’t seem to be worried enough at all), adding injury to the insult, Trump announced 10% tariffs on a further 300 billion USD worth of Chinese imports, ending the trade truce and causing a shock drop in everything from stocks to oil prices (SPX -0.90%, Nasdaq -0.79%, Nikkei -2.61%, Shanghai -1.75%, WTI -4.5% to 55 USD, Brent -3.3% to 62 USD, Copper -1.60%). (Remember, the working assumption of the market was that a trade deal will come soon, because Trump needed it badly. Needless to say, analyst commentary was one-way and negative: ’Doubling down on a failed strategy’, ’the purpose of the tariffs was to force Chine to change, but it failed to do that’, ’Trump keeps hammering world economy’, ’stocks tell Trump he made a huge mistake’. Personally I suspect Trump had the feeling that the hawks in Beijing – who want to sit out 2020 – were seizing control again, and he only had a limited time to break the Chinese leadership before it was too close to the elections.) Some suspected that the tariffs were also meant to force the Fed into more rate cuts – certainly the market was receptive to the idea, the Dollar erased some of its huge rally after the Fed (EURUSD 1.1080 from 1.1020), and bond yields plunged (US 10Y yield 1.88%, meaning, traders want you to know a recession is imminent.) In the meantime, the depreciation of regional currencies continued (EURCZK 25.81, EURPLN 4.31, EURHUF 327.50), and Boris Johnson continued its irritate-the-EU strategy by pushing for Singapore-style free ports across the UK (hey Rotterdam and Hamburg! nice business you have there! GBPUSD 1.21).

• While China amassed tens of thousands of military troops for some advanced negotations with Hong Kong protesters and the go-around-US-sanctions EU payment system had its first transaction, the Democratic presidential candidates held their second round of debates (in two parts, because there are so many of candidates).  One could almost hear the sigh of relief from Republicans in the background: During the four hours (!) of debating, the dominating theme was the hard left of the Democrats with their brutal agenda clashing with anxious more moderate Democrats, with the latter at the usual disadvantage of having little to say to revolutionaries. The main topic was  healthcare – by the way, you know that something is wrong when after half a century of talking about it, this is still the hottest topic for this party – where free  / socialized health care advocates didn’t even blink when told that their plans mean a 3 trillion USD expenditure for taxpayers. On the climate change topic (’we have 10 years to fix this and save humanity’ was the humble description), Elizabeth Warren was the most radical, proposing to spend 2 trillion USD on research, which would create 1.2 million manufacturing jobs (?), and gradually outlawing fossil fuels, which shocked moderates who only promised ’innovating ourselves our out of the problem’ or simply ’cooperate internationally and attack the fussil industry’. The same dynamic played out in economic and trade policy, where the radicals promised to raise every tax from income taxes to capital gain taxes and ’go after’ the rich and large corporates (you know what do with your stocks if these guys get elected, do you), with the moderates offering instead to only set up ’a chief manufacturing officer’ in the White House and boost the power of unions. (Regarding China, everyone was hostile to the ’abusing, stealing’ Beijing, even Joe Biden – who otherwise tried to play the adult in the room and mostly successfully. Note that despite the obligatory Trump-bashing, no-one of the candidates had a good view of the former US trade deals, and many wanted to set up a totally new system, but were strongly against using tariffs anyway.)  Immigration was relatively unimportant for the candidates (a big mistake), with several of them proposing decriminalizing illegal immigration and giving arriving people free health care and education (just imagine the global result), with the moderates ’only’ advising spending money to rebuild South America. (You have to be cruel to not to smile here). Instead, another big topic of the debates was about the slavery reparation payments for blacks – many candidates are deadly serious about this, with Williamson, for example, wanting to distribute 500 billion USD to ’heal the nation’. (Think about this for a second: During the Civil War, 750.000 people died – more than in all the other US wars combined. Furthermore, why would a Chinese-American, an Eastern European-American or a Latino-American want to pay for this, having had relatively few slaves, to put it ironically?)

Have a nice day,

Mihály

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