GMT EIGHT - World News

Market risk aversion is rising as hedge fund giants hold a pessimistic view of the US economic outlook.

The US stock market experienced a significant drop on Friday, primarily due to concerns among investors about economic slowdown and stubborn inflation sparked by the latest economic data, leading to an increase in risk aversion in the market. Investors sold off risky assets and turned to more stable safe-haven assets. The Dow Jones Industrial Average fell 748.63 points, or 1.69%, to close at 43,428.02 points. The S&P 500 Index dropped 1.71% to 6,013.13 points, ending its consecutive upward trend. The Nasdaq Composite Index performed even weaker, dropping by 2.2% to close at 19,524.01 points. As a result, the Dow fell by approximately 1,200 points over two days, the S&P 500 Index had a weekly decline of 1.7%, and both the Dow and Nasdaq fell by 2.5%. The selling frenzy in the stock market intensified towards the end of Friday, as investors worried about potential additional tariff policies or other market-shaking measures by the Trump administration over the weekend. Within just one month of his inauguration, Trump had already introduced a series of trade barrier policies, plunging the market into continued uncertainty. Furthermore, several economic data released on Friday further deepened the market's pessimistic sentiment. The University of Michigan Consumer Sentiment Index dropped to 64.7 in February, a nearly 10% decline from the previous month, exceeding market expectations. This index showed that American consumers were concerned that new tariff measures would exacerbate future inflation, with their five-year inflation expectations rising to 3.5%, the highest level since 1995. Additionally, US existing home sales data fell below expectations, dropping to 4.08 million units last month, indicating a soft housing market. The US Services Purchasing Managers' Index (PMI) also fell into contraction territory, further confirming the trend of slowing economic growth. The outlook for US consumer spending became more cautious, with Walmart Inc.'s stock falling by 2.5% on Friday, marking a second consecutive day of decline. The company's earnings report released earlier had fallen below market expectations, intensifying investors' concerns about weak consumer spending. On Friday, billionaire investor and Chairman and CEO of hedge fund Point72, Steve Cohen, expressed his pessimism. He pointed out that the US economy was facing a series of unfavorable factors, including punitive tariffs, immigration restrictions, and large-scale government cuts in fiscal spending, all of which would put pressure on economic growth. During the FII Priority Summit, Cohen stated that Trump's trade policies could potentially raise inflation while suppressing consumer spending. He believed that tightening immigration policies could lead to a shortage in labor supply, further impacting economic growth. Additionally, Cohen criticized the Department of Government Efficiency (DOGE) led by Musk for its plan to cut $2 trillion in federal spending, believing that this move would have a greater negative impact on the economy. "These funds have been flowing within the economic system for many years, and now they may be cut or even completely stopped, which is absolutely a negative factor for the economy." Cohen predicted that due to the uncertainty in the macroeconomic environment, the stock market could experience a correction. He forecasted that US economic growth in the second half of the year would slow from 2.5% to 1.5%, and speculated that the market could undergo a significant correction. "I think the current economic landscape is undergoing some changes, perhaps this situation will only last for about a year, but either way, we have passed the best period of WINOX, and I would not be surprised to see a significant adjustment in the market." With the increase in market risk aversion sentiment, investors adjusted their positions, moving funds from high-risk assets like technology stocks towards traditional defensive sectors. Market stars like NVIDIA Corporation(NVDA.US) and Palantir(PLTR.US) experienced significant sell-offs on Friday, while Procter & Gamble Company(PG.US) rose by 1.8%, General Mills, Inc.(GIS.US) and Kraft Heinz Company(KHC.US) each rose by over 3%.

1 h ago

Is the largest gold vault in the United States safe? Trump: Will enter Fort Knox to ensure that the gold is still there.

Recently, the price of gold has been nearing historical highs, and the US government is currently sitting on a gold mine. However, even selling this gold would not effectively help the federal government repay its debts. Various speculations and rumors about the US gold reserves have been circulating. Tesla, Inc. CEO Elon Musk posted a provocative post on his social platform X this week: "Who can confirm that the gold at Fort Knox has not been stolen? Maybe it's still there, maybe it's not." Musk emphasized that this gold belongs to the American public, so everyone should know whether it is still safely stored. Trump responded to this. In an interview on Air Force One, he said, "We will enter the legendary Fort Knox and ensure that the gold is still there." He added, "If the gold is missing, we will be very angry." He then announced plans to visit Fort Knox for an inspection. Musk posted a video of Trump's interview on X and joked that if the situation at Fort Knox could be broadcast live, it would be a "hot" scene. US Treasury Secretary Benson said in an interview this week, "We audit Fort Knox every year, and all the gold is intact." So, how much gold does the US actually have? Data shows that the US government stores 147.3 million ounces of gold at Fort Knox in Kentucky. At the current price of about $2950 per ounce, the total value of this gold is approximately $435 billion. However, this is only part of the US government's gold reserves. According to Federal Reserve statistics, the US currently holds a total of about 261.5 million ounces of gold, some of which are stored in the vaults of Denver, West Point Military Academy, and the underground vaults of the New York Federal Reserve Bank. Based on current market prices, the total value of this gold exceeds $770 billion. Despite the market price approaching $3000 per ounce, the US government's gold value is still calculated at $42.22 per ounce. This price dates back to the Nixon administration in the 1970s, when the government set this price to weaken the dollar, suppress inflation, and end the gold standard. Treasury Secretary Benson said in an interview that there are currently no plans to revalue the US gold reserves. In fact, the US government cannot adjust the gold's book value to market prices unless Congress passes legislation. Assuming Congress allows gold to be revalued at current market prices, the Fed's gold assets could jump from the current $11 million to $750 billion. This "book wealth" doesn't mean the government needs to sell gold, but it could give the White House and Congress more flexibility in fiscal budget negotiations, even helping to extend the debt ceiling negotiation period. Strategists at Deutsche Bank pointed out, "Revaluing gold technically can provide Treasury with additional funding and could have a significant impact on the markets, depending on whether Congress is willing to push this policy." This approach is similar to homeowners increasing their home equity line of credit because their property has appreciated, freeing up more cash. However, David Miller, Chief Investment Officer and Senior Portfolio Manager at Catalyst Funds, believes that instead of just revaluing, it would be better to sell gold directly. He said, "The only reason to hold this gold is because of the historical legacy of the gold standard. If the government sells this gold, the proceeds could be used to reduce interest payments on the debt." Deutsche Bank's strategists predict that if the US government adjusts the gold's book value, it could push back the "X date" (the date when the Treasury runs out of cash) from August 2025 to early 2026. This could help give Congress more time in the negotiations for renewing the tax cuts in 2017 and advancing Trump's fiscal priorities. But is this enough to solve the US government's debt problem? Currently, US federal debt has risen to $36.22 trillion. In comparison, the $770 billion from US gold reserves is "just a drop in the bucket." George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors, bluntly said, "We discuss every so often whether we should revalue or sell gold to repay debt. But the fact is, our gold reserves are far from sufficient." Furthermore, according to data from the World Gold Council, the total value of all gold globally is approximately $205 trillion. Even if the US government were to sell all its gold, the proceeds would still be far from enough to fill the debt gap.

1 h ago

Unexpected decline in U.S. existing home sales in January ends three-month growth trend.

In January, the sale of existing homes in the United States unexpectedly declined, ending a three-month growth trend mainly due to high mortgage rates and rising house prices, which suppressed housing demand. According to data released by the National Association of Realtors (NAR) on Friday, existing home sales in January fell by 4.9% compared to the previous month, with the seasonally adjusted annual sales volume dropping to 4.08 million units. This data was below market expectations, as economists surveyed by the media had predicted sales to fall to 4.12 million units. The sales data for January mostly reflected home contracts signed in November and December of 2023. According to data from the mortgage finance company Mortgage Bankers Association, the 30-year fixed mortgage rate increased from 6.72% at the end of October to 6.85% at the end of December, which may further suppress the purchasing power of home buyers. However, compared to the same period last year, existing home sales in January still increased by 2.0%. NAR Chief Economist Lawrence Yun stated, "Despite the Federal Reserve lowering short-term interest rates multiple times, mortgage rates have remained high in the past few months. Coupled with high house prices, housing affordability remains a major challenge for the market." Despite the Federal Reserve cutting rates by 100 basis points since September of last year, mortgage rates remain high. This is partly due to the rise in the yield of the 10-year U.S. Treasury note, which has increased due to strong economic resilience and stubborn inflation. Although the market expects rate cuts, most economists believe the Federal Reserve will at most cut rates once this year, or even not at all. In addition, the market is also watching for potential policies that President Trump may push, including tariffs, tax cuts, and large-scale expulsion of illegal immigrants, which are seen as likely to exacerbate inflation pressure and further influence interest rate trends. The supply situation in the second-hand housing market improved in January, with housing inventory increasing by 3.5% month-on-month to reach 1.18 million units, a 16.8% year-on-year increase. At the same time, house prices continued to rise, with the median price of existing homes reaching $396,900 in January, a 4.8% year-on-year increase. At the current sales pace, it would take 3.5 months for the market to absorb the existing inventory, higher than the 3 months at this time last year, but still lower than the 4-7 months level considered to indicate supply-demand balance. The average listing time for homes in January was 41 days, higher than the 36 days at this time last year, reaching the highest level since January 2020. First-time buyers accounted for 28% of total sales, unchanged from the same period last year. Economists and real estate agents believe that the market share of first-time buyers needs to reach 40% to support a healthy housing market. Cash transactions accounted for 29% of home sales in January, down from 32% at the same time last year. In addition, distressed properties (including foreclosures and short sales) accounted for 3%, up from around 2% in the past few years, indicating some signs of financial pressure in the market. Overall, the cooling of the existing home market in January reflects the continued suppression of housing demand in a high-rate environment. The future market trend still depends on the Federal Reserve's monetary policy adjustments, and whether a rate cut can stimulate more home buyers to enter the market.

21/02/2025

The optimistic mood has disappeared! The US S&P Global Composite Purchasing Managers' Index fell to 50.4 in February.

The latest data shows that the U.S. S&P Global Composite Purchasing Managers Index (PMI) fell to 50.4 in February, lower than January's 52.7, indicating a slowdown in overall economic activity in the U.S. private sector. Meanwhile, the manufacturing PMI rose slightly from 51.2 to 51.6, still indicating expansion in the manufacturing sector. However, the services PMI fell from 52.9 to 49.7, reflecting a weakening momentum in the industry, entering contraction territory. Following the release of the data, Chris Williamson, Chief Business Economist at S&P Global Markets, stated that market optimism for the next year has rapidly declined from near three-year highs at the beginning of the year to one of the most pessimistic expectations since the COVID-19 pandemic. He pointed out that businesses are generally concerned about the impact of federal government policies, including cutbacks in fiscal spending, tariff adjustments, and geopolitical factors. As a result of this data, the U.S. dollar index narrowed its gains during the day, falling to the 106.4 range, despite a slight increase on that day. The market made a cautious response to the complex signals of U.S. business activity data for February. S&P Global's previous February PMI forecast showed limited changes compared to the final value in January. The market is paying attention to future adjustments to the Federal Reserve's monetary policy, with most expecting a possible restart of rate cuts as early as July. In addition, influenced by PMI data expectations, the Euro against the U.S. Dollar still faces downward pressure in the short term. S&P Global's monthly PMI data, based on surveys of private sector executives, provides a forward-looking perspective on the overall health of the economy, covering key indicators such as GDP, inflation, exports, capacity utilization, employment, and inventories. Manufacturing PMI, services PMI, and composite PMI are the focus of investors, where an index above 50 represents expansion, while below 50 shows contraction. Due to the early release of PMI data compared to many official economic statistics, it is often seen as a leading indicator of economic performance. The January PMI data showed a decrease to 52.7, hitting the lowest level since April 2024, but still indicating robust business activity. S&P Global pointed out that the recovery in manufacturing production was offset by slowing service sector growth, while the speed of new orders growth slowed in January. However, employment growth accelerated to the fastest pace since June 2022, and input costs and product prices both rose at a faster pace. The market generally expected no significant fluctuation in February PMI data, with manufacturing PMI expected to rise slightly from 51.2 to 51.5, and services PMI expected to rise slightly from 52.9 to 53. As long as the service sector remains in strong growth, market confidence may remain stable. Investors will closely monitor the details of the PMI report on inflation and the job market. Federal Reserve Chairman Powell expressed caution on rate cuts in a recent semi-annual congressional hearing, with the market currently expecting the earliest possible rate cut in July. He emphasized that given stable economic growth, a strong job market, and inflation still above the 2% target, the Federal Reserve is not in a rush to adjust policy. If the services PMI unexpectedly falls below 50, the market may see a rapid sell-off of the U.S. dollar. But if the PMI data shows ongoing expansion in manufacturing and services remaining in the growth range, the dollar may strengthen against major currencies. If future PMI data shows rising input costs in the service industry and the job market remains solid, the Federal Reserve may maintain a tighter policy for a longer period. However, if price pressures ease and private sector job growth weakens, expectations for further rate cuts may increase, putting downward pressure on the dollar.

21/02/2025

OpenAI has launched an AI agent, Operator, for ChatGPT Pro users in multiple countries.

Microsoft Corporation (MSFT.US)-backed OpenAI has launched its artificial intelligence agent - Operator for ChatGPT Pro users in Australia, Brazil, Canada, India, Japan, Singapore, South Korea, the UK, and many other countries. Except for the EU, Switzerland, Norway, Liechtenstein, and Iceland, users in most regions where ChatGPT is available can use Operator. Operator is designed to automate various web-based tasks for users, including booking flights, restaurant reservations, filling out online forms, and shopping on e-commerce platforms. The tool runs through a dedicated web browser interface, allowing users to control it at any time. It utilizes an intelligent agent model that simulates human computer usage, enabling it to interact with graphical user interfaces on websites like a human would. This AI agent is only available to users who pay a monthly subscription of $200 for the ChatGPT Pro plan. This promotion follows the initial launch in the US in January this year. OpenAI claims that Operator outperforms similar competitive tools such as Anthropic's ComputerUse and Mariner from DeepMind under Alphabet Inc. Class C (GOOGL.US). OpenAI also stated that they are working to make this tool available to users in more regions, including the EU.

21/02/2025

Trump team emphasizes that tariffs will become a revenue-generating tool! Trade war fears may sweep the globe.

As U.S. President Trump attempts to push through tax cuts in Congress, Trump and his economic team are increasingly focusing on the revenue that tariffs policy could bring, which has raised alarm bells for countries trying to avoid a trade war. Republicans in Congress are working on a plan to extend the 2017 tax cuts policy which is set to expire later this year and implement additional tax cuts. These tax cuts are expected to create a fiscal deficit of $4.5 trillion over the next decade. Therefore, the Trump administration urgently needs as much revenue as possible, and tariff revenue has become an important tool in their policy toolbox. The Trump administration is touting tariffs as a "magic tool" and advocating for the use of tariffs in various aspects including reducing trade imbalances and increasing bargaining power over other countries. Economists have questioned Trump's logic and warned that tariffs could slow down economic growth, decrease government revenue, and provoke trade retaliation from other countries. However, Trump and his senior economic advisors' latest comments on Thursday indicate that they are increasingly emphasizing tariffs as a source of government revenue. Trump stated on social media that "a lot of tariff money will flow in" to help balance the federal budget. According to the Trump administration, part of the answer to the government revenue issue is the Department of Government Efficiency (DOGE) led by Elon Musk, which has implemented spending reduction plans. Trump stated that the government efficiency department led by Musk has saved over $55 billion in just the past month - although some have questioned this total. Meanwhile, the White House has recently been mentioning the tariffs list that Trump has implemented or threatened to impose more frequently. Chairman of the U.S. National Economic Council, Kevin Hassett, said on Thursday that the 10% tariffs policy on Chinese imports implemented earlier this month will bring in "$500 billion to $1 trillion in revenue over the next ten years." U.S. Commerce Secretary Howard Lutnick stated that the "equivalent" tariffs imposed by Trump on foreign tax systems and regulatory barriers could generate $700 billion in revenue annually. This trade emperor claimed that these funds would help eliminate budget deficits, cause interest rates to "plummet down", and ultimately drive economic growth. Echoes of history Indeed, the United States primarily relied on tariffs as a source of government revenue in the 19th century, which has become the historical basis of Trump's tariff concept. However, it should be noted that at that time, the size of the U.S. federal government was much smaller than it is today, and the situation changed dramatically after the income tax system was implemented in 1913. A report released by the U.S. Congressional Research Service in January showed that since World War II, tariffs' contribution to federal total revenue has never exceeded 2%. Official data shows that the total value of imported goods in the United States last year was $3.3 trillion, with an average tariff rate of about 3% currently applied. In order to achieve the $700 billion revenue predicted by Howard Lutnick, new tariff rates would need to be significantly increased. Economists at the Peterson Institute for International Economics calculated last year that if the goal is to maximize revenue, the U.S. would need to implement an almost 50% tariff rate, which could generate $780 billion in revenue. However, economists Kim Clausing and Maurice Obstfeld warned that as the trade landscape changes and the economy slows down, this number will gradually decrease. They stated that in the long term, implementing such policies "would actually lead to reduced revenue due to the tightening effect of such high tariffs." Since the 1930s, U.S. trade policy has always focused on reducing tariffs to persuade other countries to do the same, while opening up new markets for American goods. However, Trump and his supporters believe that this strategy has failed, citing China's rise as evidence of a global manufacturing power. Mary Lovely, an economist at the Peterson Institute, pointed out that this policy shift "completely breaks with decades of U.S. trade tradition" and could lead to price increases and slower growth. Mary Lovely added that this could backfire politically. She noted that the 25th U.S. President William McKinley once changed his tariff stance due to working-class opposition to high prices, laying the groundwork for a shift to income tax. Although the Trump team claims that tariffs are paid by other countries, research shows that these tariff costs are usually borne by U.S. importers and ultimately passed on to consumers. Mary Lovely stated that inflation would be a key factor in Trump's reelection in 2024, as "the reasons people don't like tariffs still exist." A recent poll released on Wednesday showed that Trump's approval ratings have slightly declined since he took office in January, mainly due to concerns about the economy. The survey found that 54% of respondents oppose Trump's new tariffs on imported goods from other countries, while 41% support them. Fiscal considerations Republicans in Congress are open to increasing tariff revenue in the short term. Chairman of the House Ways and Means Committee, Jason Smith, stated earlier this month, "When you consider the fiscal health of the whole country, you must take into account the potential future revenue from President Trump's trade proposals." However, this domestic priority consideration may weaken Trump's idea of using tariffs as an economic diplomatic tool. Furthermore, former U.S. trade negotiator and current researcher at the Atlantic China Welding Consumables, Inc. Council, Daniel Mullaney, said that focusing on tariff revenue may pose new challenges for U.S. trade officials who are accustomed to eliminating trade barriers rather than creating revenue. He stated, "This is a new change. Now, we view low tariffs as revenue loss and high tariffs as revenue increase." Former EU trade negotiator and current consultant at Bruegel think tank, Ignacio Garcia Bercero, warned that if increasing government revenue becomes the primary goal of Trump's tariff policy, it may be difficult to avoid a trade war between the U.S. and Europe in the coming months. He said, "From a European perspective, this is not a good thing, and it is clear that all this indicates that actual negotiation space has become very limited."

21/02/2025

10-year Japanese government bond yields hit a 15-year high, Bank of Japan states it will intervene in case of abnormal conditions.

Despite the recent steady rise in long-term interest rates in Japan, the Bank of Japan has shown almost no sign of resuming intervention measures. Bank of Japan Governor Haruhiko Kuroda issued a mild warning on Friday, stating that if "abnormal" market trends cause a significant increase in yields, the Bank of Japan may increase bond purchases, but he reiterated the commitment made when the bank began reducing bond purchases in July of last year. Kuroda stated that the Bank of Japan's stance of allowing market forces to determine long-term interest rates will not waver. Sources have stated that after abandoning the policy of capping bond yields near zero last year, the Bank of Japan set a very high threshold for conducting emergency bond purchases, with the tool only being used in special circumstances such as sudden consecutive spikes in bond yields. Since October of last year, Japanese government bond yields have steadily increased, initially driven mainly by the rise in US Treasury yields. The Bank of Japan raised short-term rates to 0.5% in January and stronger than expected domestic Gross Domestic Product (GDP) and inflation data have accelerated the upward trend in yields. Japan's benchmark 10-year government bond yield hit a 15-year high of 1.44% on Thursday as the market speculated that the Bank of Japan may raise rates to a level higher than initially expected. Following Kuroda's speech on Friday, the 10-year government bond yield in Japan fell to 1.42%, but some market participants expect yields to rise to 1.5% in the coming weeks. Chief bond strategist at Nomura Securities, Naoya Hasegawa, stated, "I don't think the market will consider it a peak just because the yield has reached 1.4%." He believes that Japan's 10-year government bond yield is likely to reach 1.5% by the end of March. Economists surveyed predict that the Bank of Japan will raise rates once this year, but the forward market shows that some investors believe there is a 69% chance the Bank of Japan will raise rates twice more. The Bank of Japan is gradually reducing its monthly bond purchases, with the current purchase amount at 45 trillion yen. At the current pace, analysts estimate it will take the Bank of Japan about seven years to halve its bond holdings of nearly 585 trillion yen, which is almost equivalent to Japan's GDP. Former Bank of Japan board member and current Keio University professor, Sayuri Shirai, stated, "Even if yields continue to rise, the Bank of Japan may not conduct emergency bond purchases, as its main focus is reducing its massive bond holdings." She said, "The pace of reducing purchases is moderate at the moment. For the Japanese government, as long as the 10-year government bond yield stays below 2%, there may not be a problem." The crucial test will come in June when the Bank of Japan will review the existing reduction plan ending in March 2026 and formulate plans for April of that year and beyond. While internal discussions on the assessment have not yet begun, this decision will be crucial for how the Bank of Japan rapidly reduces its large balance sheet. If long-term yields continue to rise, it may affect the pace of the Bank of Japan's bond purchase reduction after April 2026. Analysts indicate that rising bond yields may also impact the speed and timing of the Bank of Japan's rate hikes. However, former Bank of Japan board member and economist at Nomura Research Institute, Toyoaki Kinei, stated that the threat of US President Trump's tariffs on automobiles could raise concerns about a slowdown in the Japanese economy and deter the Bank of Japan from aggressively raising rates, thereby lowering yields. He said, "If concerns about the Japanese economic outlook intensify and put pressure on the stock market, Japanese government bonds may be repurchased as a safe asset."

21/02/2025

Under the stagnation of economic growth and uncertainties, companies are accelerating layoffs. UK's February PMI unexpectedly drops.

The survey showed that the UK's Purchasing Managers' Index (PMI) in February dropped from 50.6 in January to 50.5, only slightly above the 50 mark that separates expansion from contraction. Economists had previously expected the index to remain unchanged. Against a backdrop of stagflation, UK businesses accelerated their pace of layoffs in February. The survey results indicate that the UK's Labour government's first budget exacerbated job losses and price pressures by increasing the cost of employment. Employment in the private sector saw its largest decline since November 2020, the biggest drop excluding the period of the COVID-19 pandemic and the largest since the financial crisis. Since the budget announcement, the UK's PMI has shown economic stagnation for the fourth consecutive month, despite efforts by the Labour Party to stimulate economic growth. Businesses are preparing for the upcoming 26 billion increase in payroll taxes and significant raise in the minimum wage. However, unlike the PMI report, other indicators show that the job market stabilized in early 2025 and even improved slightly. Chief Business Economist Chris Williamson of S&P Global Market Intelligence said, "Weak economic growth, coupled with rising price pressures, indicate that the UK is facing stagflation, putting the Bank of England in a difficult position." According to S&P Global Market Intelligence, UK businesses faced pressure from declining sales and rising prices in February. As demand for exports to the EU and the US weakened, the number of new positions decreased at the fastest rate since August 2023. At the same time, business costs were growing at the fastest pace in over a year and a half, with some companies attributing this to measures in the budget. Many companies raised prices in response. Williamson said, "A key driver behind the rising inflation pressure is that an increasing number of companies are indicating the need to raise prices to offset the upcoming increase in labor costs. Survey data suggests that inflation rates are rising further from the recent 3%."

21/02/2025

On the eve of the German general election, Euro options highlight market complacency.

As the German general election approaches this weekend, euro traders are facing the risk of over-optimism. The derivative market is showing an unusual calmness: most euro options expiring the day after the election tend to show a further rise in the euro, with the market's bearish sentiment towards the euro already dissipating. The stock market is also pricing in a smooth outcome, with the German benchmark index DAX reaching a historical high. However, if the center-right coalition CDU/CSU, led by Angela Merkel's Union parties, struggles to form a coalition government, current market positions may suffer a painful reversal. In this scenario, with increased uncertainty and political maneuvering between smaller parties, the euro may trend towards parity against the US dollar. Based on this, the French Industrial Bank recommends investors to buy euro put options for protection against a decline, and German commercial banks are warning their clients of the related risks. Pepperstone's senior research strategist Michael Brown said: It seems like everyone believes that there won't be any surprises in the election. This complacency could potentially lead to a bigger shock to the markets. Brown pointed out that prolonged coalition negotiations, especially after a significant increase in support for the far-right Alternative for Germany (AfD), could lead Europe into the worst-case scenario. He predicted that the market's initial reaction could push the euro exchange rate below 1.03 US dollars. As of writing, the euro-dollar exchange rate has dropped by 0.3%, reaching 1.0466, with overall performance for the week remaining stable. German commercial bank currency strategist Michael Pfister stated that his base case scenario is for a coalition government led by Friedrich Merz of the center-right alliance, but the uncertainty over the majority of seats clearly poses a risk for the euro. According to Bloomberg's polling average, Merz's union has been hovering around 30% in support for months, with the AfD following at around 20%. Chancellor Olaf Scholz's Social Democratic Party comes in at about 15%, and the Greens at 13%. Depending on how many smaller parties secure seats in the federal parliament, a three-party coalition may be needed to form a government. Amidst these risks, options traders appear unusually calm. Data from the Depository Trust & Clearing Corporation shows that 60% of euro options traded this year, expiring on Monday, are targeting a strengthened euro. Since the beginning of the year, the euro-dollar exchange rate has been fluctuating within the range of 1.02 - 1.05 US dollars, and options flow suggests that investors expect the euro to move towards the stronger end of this range after the election. Bloomberg's cross-asset strategist Ven Ram stated: From the forex market to the stock market, the market is betting that the German election result will be in line with the polls. This is actually underestimating the risk of unexpected outcomes. If the election results are significantly different from expectations, making it difficult to form a viable and lasting coalition government, the optimistic sentiment surrounding a quick shift in debt-brake policy will be questioned, and the euro will be impacted. Expectations for euro exchange rate volatility post-election are also relatively subdued. Currently, the premium to hedge against euro volatility over a one-week period is about 100 basis points lower than the average level this year, indicating that there are almost no traders preparing for a sell-off after the election. This relative calm contrasts sharply with the tension and uncertainty before the US election in November last year, when the overnight volatility of the euro against the dollar soared to the highest level in over four years. The French Industrial Bank suggests that traders may consider buying some euro protective options to guard against unexpected outcomes. The apparent confidence in the market makes hedging costs appear relatively low, and the French bank recommends buying options to sell euros in the next two weeks to guard against the risk of the euro falling below 1.03 US dollars. Underestimated Risks Jordan Rochester, head of fixed income, forex, and commodities strategy at Mizuho Bank Ltd., stated that at present, the currency and bond markets are severely underpricing the risk of the AfD and other parties coming together to block budget reforms and increased spending. Strategists at Credit Agricole SA wrote in a report that for the euro, the worst-case scenario would be if the support for the AfD significantly surpassed the levels currently shown in polls. They noted: This could complicate the efforts to form a coalition government of mainstream parties and push the euro-dollar exchange rate back to around 1.03 US dollars. At a macro level, a major risk is that if coalition government negotiations drag on, Germany will not be able to push through budget reforms and increased spending to boost the economy and increase military spending. Trump's desire to reduce America's security role in Europe highlights the need for European countries to increase their investment to guard against potential challenges from Russia in the future. Sam Lynton-Brown, Global Macro Strategy Director at BNP Paribas, said in an interview: The market seems to assume that because there may be a coalition government that wants to increase spending, everything will happen quickly. But that's not how it works in Germany. The average time to form a coalition government is more than two months.

21/02/2025

PMI shows that the economic growth in the Eurozone remains weak, with diverging performances between the two major "locomotives" of Germany and France.

In February, business activity in the Eurozone barely grew, exacerbating concerns about the Eurozone economy still being mired in trouble. Data released on Friday showed the Eurozone's February SPGI composite PMI at 50.2, unchanged from the previous value and below economists' expectations of 50.5. Specifically, the Eurozone's February SPGI manufacturing PMI stood at 47.3, higher than the previous value of 46.6 and economists' expectations of 47; the Eurozone's February SPGI services PMI was 50.7, lower than the previous value of 51.3 and economists' expectations of 51.5. Hamburg Commercial Bank economist Cyrus de la Rubia stated in a statement, "The unremarkable growth in services offset the slightly moderate decline in manufacturing." He added that these data do not indicate an economic recovery is underway. As the Eurozone economy continues to struggle, investors are increasing their bets on a rate cut by the European Central Bank. The money market now expects the ECB to cut rates by 78 basis points this year, up from Thursday's expectation of 74 basis points. The Euro remained in decline, with the Euro to USD exchange rate falling by 0.29% to 1 Euro to 1.047 USD as of writing. Eurozone bonds continued to rise, with Germany's ten-year bond yield dropping by 3 basis points to 2.50%. Sluggish manufacturing, political turmoil in the major economies of Germany and France, heightened uncertainty from the Russia-Ukraine conflict, and the ongoing threat of US trade tariffs have all weighed down on Europe's economic growth. The latest blow comes from US President Trump, who hinted at greatly reducing support for European defense in the future, meaning Europe itself would need to significantly increase military spending and reduce spending in other areas. Eurozone economist David Powell said, "The February PMI data for the Eurozone shows a moderate impact from the increased uncertainty caused by Trump's tariff threats. However, since the details of Trump's tariff measures are still unclear, the situation is far from clear. Nevertheless, without considering trade policy, the Eurozone economy has been weakly expanding for some time, but could still benefit from further easing of monetary policy by the European Central Bank." Since June of last year, the Eurozone PMI has been fluctuating around the 50 mark. The series of rate cuts by the European Central Bank since June of last year have helped prevent economic contraction. However, the long-awaited rebound in consumer demand and business spending has not materialized, even though this year's Eurozone inflation rate appears to be returning to 2%. Ahead of Sunday's election, the German economy appears to be showing signs of improvement, with hopes that conservative Friedrich Merz, who could become the next chancellor, might streamline regulations and boost investments. Data shows Germany's February SPGI composite PMI rose to 51, higher than the previous value of 50.5 and economists' expectations of 50.8. Cyrus de la Rubia is optimistic about the outlook for the German economy, stating that the next German government might "be able to take action after the elections, which would provide a positive impetus for the entire Eurozone." In contrast, the economic outlook for France is worrying. Data shows France's February SPGI composite PMI at 44.5, lower than the previous value of 47.6 and economists' expectations of 48. In particular, both the services PMI and manufacturing PMI were below the 50 mark. It is worth noting that the overall index for Eurozone services remains high. Cyrus de la Rubia stated, "With only two weeks until the Eurozone policy meeting, there is bad news on the price front. This is partly due to wage growth continuing to outpace the average." The European Central Bank is increasingly confident that inflation will return to the 2% target level over the coming months, allowing them to continue lowering borrowing costs and supporting the economy. However, ECB Executive Board member Isabel Schnabel warned that the ECB has already cut rates five times since June of last year and is nearing a point where it may pause or stop further rate cuts. She previously cautioned that ECB rate cuts cannot solve the Eurozone economy's structural challenges. She pointed out that Eurozone economic growth is only modest, and trade uncertainty is rising sharply, with the help provided by easing monetary policy limited. "Rate cuts can alleviate economic weakness, but cannot solve structural crises, including high energy prices, lost competitiveness, and labor shortages." Under the threat of Trump's tariffs, the outlook for European economic growth is worrying Meanwhile, the European economy also faces the threat of Trump's "big stick" tariffs. Trump has complained on numerous occasions about the US trade deficit with Europe and threatened to impose tariffs on EU goods. On February 10th, Trump signed an executive order announcing a 25% tariff on all imported steel and aluminum into the United States. Trump also stated that there would be "no exceptions or exemptions" to this requirement. The US is the most important export market for European goods. Trump's tariff policy could further harm the already fragile European economy. Brian Coulton, chief economist at Fitch Ratings, said that Trump's tariff policy will undoubtedly have a negative impact, especially against the backdrop of internal growth challenges facing the European economy. He pointed out that one of the most affected European economies may be Germany, mainly because Germany is a very open economy with a high proportion of exports to its GDP, and the US is one of its important trading partners; even before the tariff adjustments, Germany's exports were already under pressure, especially in sectors such as the automotive industry, so this impact is undoubtedly negative. Fitch Ratings has revised down its growth forecast for the Eurozone in its latest Global Economic Outlook, partly based on the assumption of a 10% tariff on EU imports. Brian Coulton noted that while the negative impact on Europe is not as great as in Mexico and Canada, it is still a significant negative impact, especially in the context of weak internal economic performance in Europe. Bert Colijn, chief economist at ING Group, said that in the short term, the European economy remains in a sluggish state and is not expected to emerge from this slump this winter; initialThe footprints indicate that the economic growth in the first quarter of 2025 will still be zero. He expects that demand may drive some growth in the European economy later this year.The European Central Bank estimates that the Eurozone economy will only grow by 1.1% in 2025 and 1.4% in 2026. According to preliminary forecasts from Eurostat, the Eurozone manufacturing sector is still in a contraction phase, while the services sector is expanding. Consumer confidence remains fragile, and households have not significantly increased their spending despite actual income growth.

21/02/2025

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