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  • Marc Bentin

A Tale of Two Stories (Daily Close)


Yesterday was a tale of two stories which saw the Chinese currency and Asian markets weaken further ahead of US tariffs coming into effect by midnight today on USD34bn worth of Chinese goods while on the other hand European markets and German shares (and car makers in particular) rallied on hopes that a global agreement could be found to scrap all tariffs on cars (not only between Europe and the US but among all members of the WTO). 

This allowed to alleviate the negative  sentiment coming from Asia early yesterday. Also helping sentiment were German factory orders surging in May, ending a string of declines which suggested a pickup in activity (the European economic surprise index also shows a rebound, See Confidometer ). US Stocks also closed higher and the S&P500 added 0.9% and the Nasdaq +1.2%. Energy shares were flat despite oil dropping 1.5% on government data showing stockpiles increased more than expected and as Saudi Arabia lowered August pricing for most of its oil grades after U.S. President Donald Trump demanded that OPEC do more to stabilize markets. Banks were strong with DB gaining + 2% (still -39.9% YTD) EM markets breathed a sigh of relief for the most part yesterday (despite China’s weakness) mainly due to EM FX. MXN and RUB both rallied on expectations the bad news on these two currencies have been priced. Turkish stocks gained +4.4% as did Mexico while Russia gained +2.2% in contrast with China dropping -0.9% (-18.9% YTD). The strongest Z-scores were real estate, long dated US bonds and Mexico. While stocks recovered yesterday, bond markets rallied as well, including in Europe despite a stronger Euro, a powerful equity markets rally and some ECB officials having second thoughts on the ECB rate not starting to increase before end 2019. US bonds also rallied swiftly despite a rallying stock market. The primary reason, beyond fears of a trade backlash might be that the Fed is actually pressured, not too dissimilarly to previous administrations but perhaps a little less subtly, not to raise rates too much. We share the view that if the ECB does not change its stance, there is not more than one additional rate hike 

to be delivered by the Fed in this cycle, which should be sufficient for the US to attract capital on a pure rate differential basis.  

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