Financial markets

Bye bye, Draghi

Last Thursday, it was the last ECB meeting under president Draghi. Draghi is well remembered for his phrase: ‘whatever it takes’ back in 2012. At that time he wanted to turnaround the euro crisis. Draghi is the first ECB president that never raised rates. With massive Quantitative Easing (QE)programs and uncountable amounts of rate cuts, Draghi has been trying to keep and bring back the inflation in the eurozone at satisfying levels. He has not succeeded in that goal. Some people say the rate cuts and the QE programs did not work at all. I think they probably did work. Without them we might have been in deflation and thanks to Draghi we still have some inflation and an economy that is still quite strong.
Trump is a massive fan of Mario Draghi. Trump wants lower rates and has the opinion that the competition with Europe is not fair, as in Europe governments can borrow money for negative interest rates. Trump probably dreams of firing Powell and hiring Draghi, but Trump will probably not do ‘whatever it takes’ to get negative/very low interest rates

Stocks have been on the way up

Stocks have been rising for three weeks in a row now. Before this week, there had been positivity on the Brexit developments and in the last week the markets seem to have started an end of year rally already, There has been some rumors and reports that the US and China are actually getting closer to sign the partial trade deal that they had mostly agreed on earlier. The S&P 500 is nearing a new high and the NASDAQ has actually reached a new record.
As some earnings, like those from Amazon, have been worse than expected, investors do think that there is no decline yet in the technology growth and are getting more optimistic about the stock landscape again.

Fed can make or break the upcoming weeks

Within days of each of the previous five Fed meetings, stocks have had serious declines.

There was some fear in the markets after the last Fed meetings that the Fed was not doing enough or might be too late in reacting to the trade war escalations. As the trade war escalation has stopped for now, the Fed is still generally expected to cut the rates next week. In case the message they give with cutting the rates is dovish, a nice end of year rally might follow and can bring stocks finally to significant higher levels than we have seen in the last two years. The S&P might be close to a high, since Jan 2018 the Index has been struggling to choose a direction.
Stocks might struggle after the Fed meeting in case Powel signals that the Fed will go on hold for a while. If so, it could mean no more rate cuts are likely for the upcoming time. Rate cuts are generally good for stocks as the yields in bonds and interest rates on banks decline. To fight for yield, stocks get more attractive. Companies can borrow money cheaper and accelerate profitable growth.

Oh yes, Brexit

In the mean time the markets are also waiting for the EU to give the UK an extension on Monday for their exit time. The extension is very likely, the question is how long will the extension be? Most likely it will be an extension of a couple of months. In that case, Boris Johnson will probably call elections that will be held before the end of the year.

Brexit, an ongoing story coming to an end?

The Brexit saga has been going on since June 2016, when the people of the UK decided in favor of a Brexit. Since then there has been a long negotiation process with the EU. The UK wants a great deal, wants to make it difficult for the UK, and as good as possible for themselves. The EU does not like Brexit to become a success story. This could lead to more countries following the same path in the future. The EU also does not want a chaotic Brexit as this will harm the European economy.

Boris Johnson agreed a deal with the EU

On Thursday, Boris Johnson agreed a deal with the EU and now needs to get it through parliament. Tricky, but possible. If he gets it through parliament, then the Brexit saga might finally come to an end and the UK can leave the EU with a deal. Markets will be relieved and the European economy will be posively affected by an orderly Brexit.

Boris Johnson was forced to request an extension

The Brexit is anything but done yet as the UK parliament probably first need to vote on the deal. In the mean time, Boris Johnson was forced, in line with the so-called Benn Act, to send a letter to the EU reqyesting a three-month extension to Brexit. Johnson did not sign the letter and he then sent an extra letter in which he said that he does not think there should be an extension. Boris Johnson has always said the UK would leave the EU on the 31st of October, with or without a deal. It is quite likely he is not going to deliver on that promise.

What’s next?

The government of the UK plans to hold a meaningful vote on Monday where the parliament has to say yes or no to the deal. The vote might pass, but it is definitely not a high certainty. More like a 50/50. Above all, it is not clear yet whether the Speaker will allow that vote to take place. The government could also try to press ahead with legislation to implement the deal next week. A meaningful vote is in that case not needed.

Most likely case

The most likely outcome is that the UK will not be leaving the EU on the 31st of October and that another extension is needed. All 27 EU leaders have to agree on such an extension. The extension will probably happen. The expectation is that new general elections will be called in the UK. This election can help forming a strong government that can actually get a deal through the parliament.

Market uncertainty?

The chance of a no-deal Brexit has gone down significantly in the last weeks. Boris Johnson has shown he can actually agree on a deal with the EU. This brought optimism to the financial markets. The deal might not pass parliament, but still there is a deal and Johnson has been forced to ask for an extension. It is very unlikely the UK will exit the EU on the 31st of October. The story is going to continue. It is likely the UK will eventually leave the EU with a deal. The question is: when?

13-10: Partial deal, why?

Markets have been very optimistic in the last days. The S&P went up over 1% on Thursday and also on Friday. Trump was giving the market hopes on a partial deal with China. Next to that there has been a bit of optimism on the Brexit saga.

Trump and China finally agree on something

As during every negotioation so far, Trump often tweeted that trade talks are going well and that he has warm feelings about China. Quite often a day later he would wake up angry and come with new sanctions or show his annoyance with China.

But this time the market got more optimistic in the last days and finally Trump and China made a partial deal, called Phase 1 deal. Main outcome was that the October tariff hike will not happen, that China will buy more US agricultural goods and that China opens their market for US financial institutions. There has not been a decision made yet about the new tarifss that kick in in December. The current deal might mean a longer de-escalation of the trade conflict.

Why does Trump make a deal now?

In the end it all comes down to game theory. It is not just about the details of the deal. It is more about the fact that Trump wanted people to see that he fights for the US economy and that he wants the Americans to think that he gets a great deal with China. If he would sign a deal on day 1, even if it would be a good deal, it would look as a quick deal that would not be in the benefits of the US. So he had to wait a bit, put some tariffs on China and let people think China is becoming his child and needs to sign a deal to make sure the Chinese economy holds up. Trump is very good at these kind of games and it is wise he signed a partial deal.

Why not a complete deal?

A complete deal could be a sign of weakness from Trump. First Trump and China were complete enemies and now they would make a complete deal? That would sound strange. Currently Trump can say that the Chinese gave in a bit and a partial deal was possible. To get to a full deal the Chinese have to do more concessions. Trump keeps the possibilities for further measures open. Next to that, Trump wants the Fed to lower interest rates in order to boost the economy. If Trump would sign a complete deal now, quite a bit of geopolitical worries would be gone. The Fed might decide to not further lower the interest rates.

Financial markets are quite relieved and no further escalations and a Brexit solution can bring a heavy end of year rally in stocks. Stocks have been suffering for nearly two years and there can be some optimism now for the next months.

06-10: Economic data pressure

For a very long time the stock bull market has been strong based on the fact that economic data was solid and interest rates were low. There was no reason for investors to avoid stocks. Stocks, especially US stocks, have been doing very well in the last 10 years. The US economy has been strong and unemployment is currently with 3.5% at the lowest since a very, very long time.

Panic on bad economic data

On Tuesday a bit of panic in the stock markets started. So far we had mainly been experiencing bad data coming from Europe, where the huge German economy is falling into a recession. A US recession is still quite far away, but a bad ISM Manufacturing PMI caused the US stocks to start a two day sell off. The figure is a barometer of US manufacturing conditions and showed that conditions fell to the lowest since the great crisis in 2009.

On Thursday there was more bad data coming in from the ISM services PMI. Stocks ticked down over 1% immediately and quickly after rebounded to end the day in the plus. On Friday the S&P rebounded another 1.5% after the monthly jobs report that was not bad at all..

Quite some bad news came in, but why did stocks recover that much?

The markets are a little bit in the stage again of bad news is good news. In the sense that the markets do expect the Fed to cut rates more or come with extra stimulus in case the economy shows signs of weakness. With the expectations that the rates go lower on bad data, the enthusiasm comes back as there is no great alternative to stocks at very low interest rates.
Since the beginning of 2018, stock markets have been struggling. Volatility has picked up and stocks have had strong declines on issues like the trade war and bad economic data. Every time the central banks have been able to bring back rebounds in the stock market.
Company earnings season is kicking off soon. It is going to be very interesting to see if the companies can still report satsifying profits. If they disappoint and guide to more weakness to come, the stocks could get into a more serious longer down turn. Some stocks have already experienced these kind of downturns and are ready to be picked up.

28-09: Taking one for the team

Markets have been a bit concerned around the impeachment procedure that the Democrats started against Trump.
The Democrats do not think they have much chance of winning the US presendential elections next year. They have waited for three years to hope a great candidate would pop up out of nowhere but it did not happen. Trump is surviving and the US economy is still in a solid state. The Democrats needed a good candidate or a stock market crash to be able to easily win the elections in November next year. Currently, they will probably lose against Trump. So, they had to come up with another strategy than by just winning it on quality.

Nancy Pelosi has started the impeachment procedure against Trump

Joe Biden is the sacrifice

The Democrats are going for the sacrifice option. They are sacrificing Joe Biden and try to bring Trump down with him. They have lost all confidence in Biden and think that the chance of bringing Trump down is even bigger than Joe Biden to win the elections next year. As has been everywhere in the news lately, Trump tried to use his presidential powers to influence the elections of next year by requesting Zelenskiy, the Ukrianian President, to investigate Bidens actions. Biden had requested to fire a prosecutor in Ukraine. At the same time as this prosecutor was investigating an issue with a company, of which Bidens son was a board member. It is not yet proven that the two are connected, but it does not look good for Biden.

The Democrats started an impeachment procedure. Because they started this whole thing, also Bidens actions will be investigated in further detail. This will most likely not help Joe Biden. But if the democrats can impeach Trump or can let him look very badly, they are happy to sacrifice Joe Biden.

Elisabeth Warren is the goal

The Democrats are putting their money on Elisabeth Warren. She was already doing well in the polls compared to Biden and the Democrats see her as their only option to win the elections. If Trump can be impeached or looks very bad, the Republicans have not really any alternative. It will be an easy win for Elisabeth Warren. Elisabeth Warren is a massive climate fighter and is willing to let the economy pay very hard for it. A Warren presidency will be very bad for the economy and the stock market, if she at least does some of the things she has been promising. She wants to overnight move away from all fossil energy sources. Politically impossible and economically as well, but if she pushes for it, it will affect the markets and the job security for a lot of Americans.

Chances of impeachment

An impeachment can only succeed if it passes the House of Representatives and the Senate. In the House there needs to be a majority. It will likely pass the House as the Democrats are in the majority. In the Senate the impeachment needs to be supported by at least two third of the votes. The Republicans own the Senate so this is very unlikely. Republicans have so far always supported Trump. Only if Trump really did something outrageous, Republicans might turn against him. Anyway, for the moment an impeachment procedure that passes both the House and the Senate can be expected to be very unlikely. Next to that, it is also unlikely that Trump will resign himself because of any scandal. He will stay in the Oval Office till the end.

What if there is an impeachment?

Trump will not be president anymore and Mike Pence takes over until the elections in November next year. Obviously the Democrats will have a great chance of winning in the case of an impeachment..

21-09: Rate cut

Markets are calm and waiting for a direction

Without the US-China trade war and the Brexit soap, the markets would be in very calm weather. Central banks are keeping the bull market alive and do take the measures that are expected from them. These days, central banks prepare the markets quite well. Not many surprises have been happening in the last couple of years. This week the main event was the rate decision by the Fed, the central bank of the US. As expected, Fed chairman Powell announced to cut the interest rates by a quarter percentage point for the second time this year. It was the second rate cut in a decade.

Why a rate cut?

The Fed wants to keep the economy going. The labor market is still strong, the unemployment low and economic activity has been rising at a moderate rate. Though, business investments and exports have weakened. Moreover, the core inflation is running below 2% on a 12-month basis. That is on the low side. The economic outlook has worsened this year. The trade war and the Brexit soap have brought quite some uncertainty in the economy and businesses are less eager to invest and grow in the current environment. Based on this and the low inflation, the Fed decided to lower the interest rate to the target range of 1.75-2.00% (from earlier 2.00-2.25%). It gets cheaper for businesses to borrow money and the lower rate should help fight the uncertainty of the geopolitical challenges and uncertainties. In order to keep the economy going.

More rate cuts to come?

The members of the committee that decides, the FOMC, are quite split on what will (have to) happen next. For the meeting of this week, 7 out of 10 officials voted in favor of the cut, two opposed it and one wanted a half percentage point cut. Powell signaled that the rate cut was not the start of a downward cycle and said that the Fed keeps on monitoring incoming information and will act as appropriate to sustain the expansion. The members of the FOMC are having different opinions on what might happen next.

What factors will influence the future Fed decisions?

  • US-China trade war
  • Inflation figures
  • GDP growth
  • Job market numbers (Non Farm Payrolls)
  • Brexit developments

What does Trump want?

Trump can shout and be angry. But the Fed will decide what to independently of what Mr Trump wants. Trump wants lower and lower rates which will weaken the Dollar and will give a boost to the economy for his Nov 2020 election. Theoretically there is some dependence between Trump and the Fed. Trump can theoretically fire Mr Powell. He most likely would not do that as it would undermine the confidence in one of the most important organs, the central bank of the biggest economy.

Lower rates can boost the stock markets as the economy might get a boost from it and bond holders might shift their money towards stocks as well.

One last time Draghi

The main event of this week was the ECB meeting in Frankfurt. As we know the economy of the Eurozone is showing signs of weakness with Germany most likely soon entering an official recession: two consecutive quarters of negative GDP growth. The ECB mentioned earlier this year again that the risks in the eurozone are tilted to the downside. Overall markets seem to be in the late stage of a bull market with geopolitical trade risks. The ECB was expected to come with new stimulus to bring back inflation and to avoid further detoriation of the economy in the Eurozone.

What is the main goal of the ECB?

The main goal of the ECB is price stability. They aim to have the inflation in the Eurozone below, but close to 2%. The idea is that the benefits of price stability are substantial. According to the ECB, maintaining price stability on a sustained basis is a crucial pre-condition for increasing welfare and growth potential of an economy. All measures the ECB take are focused on this price stability and should be positive for the Eurozone economy.

Which important measures did the ECB take this week?

  • Lowering the deposit rate facility from -0.4 to -0.5%.
    The deposis rate is the rate at which banks can deposit reserves overnight at the ECB. It gets more expensive for banks to deposit money at the ECB overnight. The idea is that banks will be even more eager to lend money to their clients which will help investments and give a boost to inflation and the economy.
  • Quantitive Easing (QE) again by buying €20bln government bonds each month, as long as neccesary.
    The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn will boosts investment.
  • Two tier system for banks that deposit reserves at the ECB.
    To make sure the banks do not get punished too much by the low interest rates, parts of their reserves are exempt of the negative desposit rate facility.

What does this mean for the stock market?

Most of the above measures were already expected by the financial markets, but markets were still happy that they were taken. Stocks markets went up around 0.5%. For the upcoming time, with the measures taken, one can expect that the interest rates stay very low. In Germany the 10-year yield will probably stay below 0% for a while. Even yields in more risky countries like Italy are very low. The Italian 10-year yield is below 1%.
Stocks will probably stay populair for the upcoming time, possibly at least 1 or 2 years. The investor that looks for yield finds it difficult to avoid stocks. Interest rates are low, bond yields are low, the bank account is useless. Companies still make good profits and quite some pay good dividends as well. And maybe interest rates will stay low for a long time to come. There is not a great alternative for stocks.
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06-09: B(O)REXIT?

The stock market has been moving up in the last trading days. Markets have been calmed by two situations:
– No-Deal Brexit less likely
– Trump and China back at the negotiation table

No-Deal Brexit less likely
Boris Johnson has experienced a very difficult week. Before this week the odds for a No-Deal Brexit were going up quite a bit and reached somewhere around 40%. This week Johnson lost a couple of very important votes in the British Parliament and he lost his parliamentary majority.
On Wednesday Johnson lost a vote. Parliament (including some own party rebels) voted that the UK cannot leave the EU without a deal. Johnson panicked and rebels were eliminated from his party and he lost the majority in the Parliament.

To save himself, Johnson saw one possibility and that was to call new elections which would be held October 15th. Also here he got defeated by the parliament. Johnson aims to try it again but the opposition already told him they would block it.
Moreover, today also the House of Lords has voted for a law against a No-Deal Brexit possibility.
Boris Johnson finds himself in a difficult position now. He has been saying that the UK will leave on the 31st of October, with or without a deal. Parliament blocked a No-Deal Brexit, so Johnson needs to make a deal with the EU and get it through parliament before the end of October. That will not be easy, thinking back of Therese May’s adventure. Johnson will probably be forced to ask for an extension from the EU. This would probably mean a Borexit, as Boris Johnson promised not to extend the Brexit soap.

Trump and China back to the negotiation table
For what it is worth: Trump and China are back on speaking terms and decided to meet in early October to negotiate again about the trade war. The markets have been reacting positive to this news. But remember, one negative tweet from the Donald and it is all different. To be continued.

What now?
The Brexit story could continue and might give a bit of more relief to the market. The worst case scenario of a No-Deal seems to become less and less likely. For the trade war we might have to wait till October before big news comes out. On the other hand, with the stock markets going higher in the last days, Trump has some ‘room’ for angry China tweets again.
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01-09: Rebound & Brexit

The stock market had quite a strong week. Friday before last week was shaky with Trump adding tariffs of 5% on all Chinese goods. Followed by a lot of dramatic and very bearish news articles about what would happen on Monday. When everyone is so negative, very bad news is quite often priced into the markets.
And yes, we ended Monday with a plus. During the week we had more upticks. The trade war tensions between the US and China calmed down a little bit. China had indicated that they want to go on with the negotation talks and that these talks should aim at removing the tariffs. China also said not to retaliate on US latest tariffs. It is nice that they say that. Markets like it. But things can turn very quickly here as we have seen before. The last time China retaliated came a couple of weeks after new US tariffs. By then China also said that they have many more options to fight the US if needed.
So the conclusion of this week is that the markets do follow quite literally what the US and China say every day and do not take into account that much of these words might not mean a lot anyway. So I do not think that much changed over the week. Thoough the markets were quite bullish and making back the losses of the week before.
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Brexit developments

Boris Johnson said that the UK is definitely going to leave the EU on the 31st of October 2019. Ofcourse he needs to be clear on this and cannot go into negotiations with his parliament and the EU with showing any doubts. According to Betfair and what I have been reading the chances of not leaving the EU on that date might be somewhere around 50%.
As always in Politics, negotiations always take very long and are not easily done.
Moreover, the chances of a No-Deal Brexit have gone up recently and according to the betfair markets are now somewhere around 40%. JPMorgan came yesterday with the expectation of 35%. So a very reasonable scenario.

Important issues for the UK (in case of No-Deal)

When going to the supermarket you will see quite some products to be more expensive or not available. Nearly 30% of all food comes from the EU.
Travelling to Europe becomes a pain, some medication might me not available, UK people living abroad need to take extra measures, house prices might be affected, etc.
On the short and medium term it is a massive pain. On the longer term there might be benefits as the UK can make their own trade deals with countries like the US. They probably get a ‘GREAT’ deal if we may believe Mr Trump. Good to know is that any deals made can not be implemented in the first 21 months after leaving the EU. So the economy might really get a short/medium term shock. So can the Pound and the big financial industry in London.

Important issues for the EU (in case of No-Deal)

Countries in the EU trade a lot with the UK. The problem with a No-Deal Brexit is that costs will rise due to more custom controls, extra tariffs and increased costs in the supply chain. Costs will be higher and things will cost more time. For countries with quite some import and/or export to the UK, this will have a significant effect on their GDP.

Not everything is Trumps fault, its Brexit!

This already appeared by looking at the German GDP in the second quarter which was -0.1%.
When the number came out analysts were initially thinking it was due to the trade uncertainty regarding the US and China and also (potential) US tariffs against Europe.
German exports to the US actually jumped compared to last year. German exports to the UK fell with 15% year-on-year and has been causing the GDP to go negative. The Brexit uncertainty is most likely bringing Germany into a recession.


24-08: Ping-Pong against China

Before the US markets opened yesterday, China announced to put new tariffs of $75bln on US goods and resumed tariffs on US cars. Not a bad move from China after Trump showed some ‘weakness’ and tried to deescalate the trade war a couple of weeks back by delaying tariffs on some Chinese goods to the end of the year. China has the initiative now. Trump was very angry about these new tariffs. Probably while he woke up and was brushing his teeth he asked himself the question who is the bigger enemy: Powell or China? But more importantly, about who am I going to tweet first? His impulsiveness especially on China is not helping him.

With this tweet, he had to come back in the afternoon with a retaliation that would not be weak. He also immediately tweeted that US companies should rapidly start with finding alternatives for China. But what he came back with in the afternoon was not very creative. He came back with raising all tariffs on Chinese goods with an extra 5%. Little bit of a small hike and not showing strength. But he had to do something after his ‘just out of bed’ tweets.
End result was that the S&P fell nearly 2.5%!

Started the marathon with aggression

Trump started this trade war very aggressively and as with every war or match, getting to 1-0 is always what you want.

But he has been too aggresive, too coercive and limiting the options the US has. He started the marathon with a sprint, now to find out that he is not able to finish in time while the Democrats are lining up for beers at the finish to have a nice dinner with the Chinese.
With the back and forth sanctions between the US and China, the trade war ping-pong has started. Very bad strategy to play ping-pong against China.

Why is that?

Trump wants to get reelected in November 2020. And he also wants to make sure the US stays the prominent economy in the world. The US has a massive trade deficit with China which Trump sees as a threat for US jobs and national security. Moreover, China has deserved the reputation as an intellectual property thief. With the trade war Trump wants to slow China’s economic growth further to make sure they will negotiate about the topics that Trump finds important. Trump thinks the Chinese have no other way than to do concessions. Wrong!
The problem is that Trump’s time is running out. If he goes to far with the trade war, the US economy will be hurt badly as US consumers have to pay the bills for the trade war. He will have small chances to get reelected in a full escalation.
China is playing it hard. They are happy taking an economic hit now and make an ‘easy’ deal when a Democrat gets elected as president. Trump is getting out of options. He was hoping for the Chinese to give in and make a nice deal with him. He has been pushing the Chinese so much and not doing any concessions himself. The Chinese have taken over the initative, are ready for some smashes and the only thing Trump can do is defend to stay in the match, hope for the best and probably give up a little bit in the end.

Jackson Hole

Main expected event this week was the yearly conference at Jackson Hole. A valley somewhere in the middle of nowhere in Wyoming in the United States. The FED holds its annual economic symposium in Jackson Hole. But there is no need to talk much about it. The FED will take appropiate actions when needed according to Powell and currently he did not seem that concerned about the economy (yet?). Non event. When would the FED not take appropriate actions then? Words, but empty sentences.
For Trump, every outcome except ECB-like rates are not enough and he blames Powell for not doing anything.

And now?

It is getting clear that Trump is slowly losing this trade war and the Chinese have made up their minds. They are not going to be nice and happy. They are going to fight hard and go for a deal with a democratic president. My opinion is that the Chinese are not going to give in and that Trump is going to get a lot of pressure from the big US companies. He has to give in here and there, though this might take months to happen. Till then the markets will be volatile. Trump is pressuring the FED to lower rates more in September and be dovish. And after that make a ‘GREAT’ deal with China?
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