The stock market dropped this week (S&P500 -1.25%) – how could we explain that?
Economic data from last week’s releases were not exactly weak. China’s industrial production and US retail sales have been better than expected and the expected Fed cut in July still remains.
US-UK tension with Iran is also unlikely to have many ramifications as the oil prices have been dropping for the week (CLA -6.6%). Other than some corrections, the mood of the main street has probably been catching up with the US-China somber bilateral trade relationship for the past few months – Goldman Sachs reported dimmer outlook and more pessimistic sentiment from US biggest corporates’ communications.
Russell 1000 Consensus EPS earning has also fallen into negative territory. Hence Fed’s cut in July seems to be fundamentally important for the US corporates to get a breather before global growth hopefully recovers from better the US-China relationships in the future. Despite Fed William’s dovish comment on Thursday (that made USD dollar downward spike before reverted itself the next day), 25bps cut in July is a more likely scenario, down from 50bps market pricing which had sent stock markets soaring the weeks before.
Next week we will see Germany Manufacturing PMI and ECB decision as key macro headlines – while Draghi’s dovishness is not something new, given EURUSD has failed to break upward technically, we may see it testing previous low on any unexpected bearishness and further gloomy Brexit news.
For those who want to play safe amidst uncertainty and believe in trend following, gold is an alternative asset that can be considered for allocation rotation as well (Ray Dalio of Bridgewater has recently shared a similar view on this).
