The market more or less has moved according to our scenario – was supported by the potential rate cut (read My Market – Trade War Intensified 26 May 2019 Edition). There is still no clear hint on how the trade war is going to play out. At the same time, it will still be the key driver of any upcoming trend despite we have seen volatility, especially in the FX and Rates market, coming from ECB’s comments on the growth outlook and weaker US Non-Farm Payroll.
As we mentioned in a few of our previous letters, macro players had been long USD and they’re fidgeting to take profit on their position. Short term fast money has already started to sell it against Asian EM pairs [ironically was quickly shaken on PBoC statement on possible weaker RMB on Friday]. But Draghi’s acknowledgment on somewhat better economic data for Eurozone and finally weaker US NFP (75k instead of the forecasted 175K!) were the ones that deliver the blow as US dollar index dropped to its lowest level while EURUSD climbed to its highest straight away since April and March this year respectively.
Trump announced that he’s reached a deal with Mexico over the weekend and will likely drop tariff against it. Therefore we might observe a massive US dollar unwinding to continue well into next week. Why – you might ask when the US-China tension is still high and the market should still be in ‘risk-off’ mode. Well, probably the answer is something to do with market positioning.
The market is undoubtedly still weary and weaker US data can’t mean ‘risk-on’, and we can see this in a lower level in USDJPY, US10 year rate, and still weak oil futures. But as we said previously, the stock market (S&P up ~1%) is ‘perversely’ happy from the potential rate cut, and now almost a full cut by the Fed has been priced in for July. So yes, market conditions have not improved as the fundamental growth prospect has actually worsened.
But this will bring the flipside onto the table, if US-China can reach some sort of a trade deal over the G10 summit this month, the stock market may actually drop on potentially good news.
For now, standing on the sideline is probably the best way to trade the market. Next week, we will have US PPI, CPI and Retail Sales data on Tuesday, Wednesday and Friday respectively – it’s critical to see if we will see more confirmation of the US data weakness trend.
