Tuesday marked a second day of souring sentiment across global equities as doubts grow about the Fed’s willingness to underwrite risk-taking with preemptive rate cuts at a time when the economic case for easing is tenuous in the US.
Some worry political pressure has made the situation worse for the Fed, as any rate cut will be eyed as a concession to Donald Trump, who continues to demand looser monetary policy.
The Deutsche Bank story continues to cast something of a pall over markets, although aside from possible liquidity provision vacuums as the bank exits certain businesses, this is largely an idiosyncratic story. Of course, that won’t keep financial media portals from milking it for every, last click it’s worth – I noticed on Monday that DealBook appeared to be taking the lead on getting pictures of people who have been fired leaving the building. “You stay classy, San Diego”.
Not to rub it in when it comes to the shares, but the ~9% the equity has fallen this week isn’t exactly what one might call “out of the ordinary”.
Of course, it doesn’t say much about confidence when you cut 18,000 jobs and pull the plan out of the “break glass in case of emergency” box only to see your shares plunge. For years it’s been “this is not ambitious enough”. Now it’s “this is too ambitious”.
Tensions between Tokyo and Seoul continue to weigh on sentiment in Asia, as does the US-China dispute which, frankly, seems to have gone largely nowhere since the G20. Chinese shares fell again on Tuesday after a ghastly Monday. This is shaping up to be the worst week for mainland equities since Trump restarted the trade war on May 5.
In Hong Kong, Carrie Lam declared the contentious extradition bill that sparked violent protests “dead” on Tuesday, but her efforts to save face by stopping short of withdrawing it seem certain to irritate critics. “Our work on the extradition bill amendment is a complete failure”, she told reporters. The bill was suspended early last month. Technically (although probably not practically), it can be resuscitated, which is all the excuse folks will need to take to the streets again. Honestly, there’s nothing she can say. It looks like this is a can of worms that cannot be closed. Hong Kong shares have fallen for five days in a row. Meanwhile, the liquidity squeeze appears to be abating, as HKD sinks back into the weaker end of the band.
In Europe, bellwether BASF served up a poignant reminder of how pernicious the trade war really is. The world’s largest chemical company sees profits diving 30% this year “mainly due to the trade conflicts”. The company cited “considerably weaker-than-expected” biz dev in the second quarter and the ongoing slowdown in global economic growth and IP. “The G20 summit at the end of June has shown that a rapid détente is not to be expected in the second half of 2019”, the company warned. “Overall, uncertainty remains high”. Obviously, the manufacturing slump in Germany hasn’t helped. Citi cut its price target for the shares and JPMorgan and HSBC issued downgrades. The company’s € 1 billion of November 2027 bonds fell the most since December 10.
All told, there’s not much to like this week, and markets seem to be yet again waiting on Jerome Powell to rescue sentiment during his testimony on Capitol Hill. If he attempts to walk back expectations for even a 25bp cut later this month, it could undermine confidence even further which, ironically, may be just what the doctor ordered. After all, if Powell can manage to engineer a rapid selloff between now and the end of the month, he’ll have a plausible excuse to cut.