Market update: Traders near panic after US yield moves, pressure grows on Berlin to avoid recession, banks plunge

by Mihály Tatár

Good Morning!

• Well, Tuesday’s bounce and optimism evaporated faster than even the pessimists expected: Having been already under pressure from the depressing Chinese data and the numbers coming out confirming the German no-growth (-0.1% Q/Q, 0.0% Y/Y, – remember, Brexit and the US-EU trade war haven’t even started yet – ), the sentiment morphed into near-panic when US yields plunged again and the US 30Y bond yield dropped under 2% for the first time ever. (This, along with the US 10Y yield trading inverted at 1.55% with the 2Y yield, has several practical technical implications for capital markets, but in plain English, it means investors now fully expect a global recession with central banks having little chance but to run after the events.) Needless to say, in this mood, risk taking disappeared faster than the smiles at CNN during election night (SPX -2.93%, Nasdaq -3.02%, Nikkei -1.40%, Shanghai -0.74%, WTI 55, Brent 59 USD, Copper -1%), safe-havens jumped (Gold 1524 USD, EURCHF 1.0840) and banks resumed their downtrend at a rapid pace (Eurozone banks -3%, Commerz -5%, BNP -2.6%, US banks -4%, Citibank -5%, JPMorgan -4%).

• In a strong contrast to the near-panic mood on major markets, most regional growth figures were actually quite breath-taking (Hungary +4.9% Y/Y, Poland +4.4%, Romania +4.4%, even Ukraine bouncing +4.6%, most Germany-sensitive Czech Republic +2.7% and Slovakia +2.5%). As discussed here several times earlier, while surely the Eurozone slowdown will be felt harder in the region in the coming months, the mainstream analyst doctrine that the regional growth was simply a derivative of German growth plus EU payments should have been handled with healthy scepticism a long time ago. (In fact, if anything, what we have learned is that the German economy is a derivative of Chinese growth in its current setup. Who would have thought that the difference between German and Hungarian growth can widen to 5%? Certainly not any economics teacher I ever met at university. It’s no wonder German business circles are tense and are increasing the pressure on Berlin to finally do something: Since it can borrow at negative rates, it should go to the financial markets and issue double-digit billions of Euros and then spend it, or at least cut damaging taxes, as the Federation of German Industries now proposes, for example. (Also note that while the EU is still insisting on disciplining the UK and ’not allowing cherry-picking’ to avoid further departures, US National Security advisor John Bolton is offering the UK ’rapid, sector-by-sector’ trade deals, potentially ripping out the country from the EU’s orbit.)

Have a nice day,

Mihály

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