Market update: China tries to relax traders, oil prices plunge until Saudis intervene, Kashmir conflict escalates

by Mihály Tatár

Good Morning!

• Easing the immediate market tensions, China tried its best to communicate that it won’t let a rapid and drastic Yuan depreciation happen (as a ’proof’, it fixed the Yuan only mildly lower at 7.0039), and Trump called for the Fed to ’cut rates bigger and faster’ (SPX +0.08%, DAX +0.71%, Nikkei +0.47%, Shanghai +1.19%, EURUSD 1.1210). The bounce, however, didn’t alter the impression that the hottest phase of the trade war just started: Gold 1506 USD, plunging lower at one point WTI 51, Brent 56 USD – you know things are serious when Saudi Arabia has to verbally intervene and announce that ’it contacted fellow producers to discuss how to halt the slide in prices’. Yields also crashed lower, with the US 10Y yield briefly falling to 1.60%, prompting Pimco to warn that US yields can actually go negative. (Note that if you ignore the noise created by seething analysts, that would be 1. great for the US with its record-breaking budget expenditures 2. a catastrophe for savers and pension funds globally, most of which already struggle to achieve positive real yields. Don’t forget the largest wave of people – both in absolute terms and relative to their societies – will need those pension savings in the coming decades. It might be that contrary to the general consensus, at the end the most primitive, least markets-oriented pension systems will prevail.) The German industrial production continued its steady downtrend and production dropped 5.2% Y/Y (! but hey, as politicians in Berlin told us, there is nothing to worry about or no need to do anything), with the Hungarian figure showing an expansion of 4.1% Y/Y. (Some commentators were quick to point out that because M/M production was 1.8% lower, this is a proof the slowdown arrived to Hungary. Let’s hope it will stay so dramatic.)

• While the German media heatedly debated whether not allowing immigrant children with zero German knowledge to go to school was a form of fascism (I let you decide), and Iran reportedly jammed ship GPS navigation systems in the Gulf, the Indian-Pakistani tensions went out of hand and escalated quickly: Pakistan warned that its army is ready to go to ’any extent’ against India’s move to revoke the autonomous status of Kashmir, downgraded diplomatic relations and suspended bilateral trade with India. (Just to make sure, heavy artillery fighting also erupted along the Line of Control.) The trade development is rather symbolical – bilateral trade between the two countries is roughly 3% of Pakistan’s total trade and 0.3% that of India – but as discussed here earlier this year, while everyone is trained that after a few days of shelling exactly nothing will happen, the reality is that the situation is indeed explosive: Since the US-Pakistani relationship deteriorated to the point of Pakistan unofficially joining the China-led block and India is more and more aligned to Washington, the chance of a proxy war is rising rapidly. (In the past, whenever a border shootout threatened to turn into a war, both turned to their ally and check writing uncle, the US, to work out a face-saving cease-fire.)

Have a nice day,

Mihály

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