It’s hard not to love … or hate Trump – for all the volatility that he has created from his comments and tweets. The market sentiment had shifted dramatically last Tuesday, as out of the blue, he mentioned having a good phone call with Xi Jinping. S&P500 was higher by 2.2% last week (though not exactly for this reason as we will elaborate below).
If we only follow the stock market, the shift of the sentiment is probably not that obvious from the straight upward trajectory, but if we track the price movement of the forex and commodities then this would have been very obvious. The jump of oil futures from Tuesday low to Friday of around 10pct and the drop in USDCNH of around 10 big figures from the high to the low of the week have told us the story.
The risk-on sentiment was supported by the Chinese leader to meet Trump in the G20 summit next week. The USD buying wave that had been accumulating since May finally found its breakpoint and clear reversal signal. In the Asian EM market, USD long positioning was overcrowded that we saw one of the most intense dollars selling sessions in this space (USDSGD and USDTWD, for example, dropped 1.2% and 1.48% respectively).
We also saw massive sell-off in the short-dated swap point in TWD and IDR. Asian stock also shared the positive sentiment by rallying in tandem (Hang Seng +5%, Shanghai Comp +4%, Taiwan TAIEX +2.6%, etc.). Is economic growth out of the wood? Well – no, we don’t think so! Fed had clearly expressed its dovishness and removed the word ‘patient’ in its last FOMC meeting, removing its barrier to lower overnight Fed rate next month (the market has priced in 100% of cut in July).
The recent weakness of the US economy cannot reverse its course overnight. But what the price action tells us is that, despite the usual overreaction in the market price, market participants now think that they have seen the light at the end of the tunnel. Indeed, if Trump really can come up with a good trade deal with Xi, then the global economy will be saved and we can see it tracking back its original path of growth. Nevertheless, many skeptics think that it will be hard for the US to align itself with China if they still intend to politically constrain China from becoming their formidable rival.
In any case, the G20 summit will be the highlight of next week’s events, which will start on Thursday – better to stay agile and light in terms of positioning!
