The market was relatively quiet despite FOMC’s rate cut decision last Thursday.
Last week, the drone attack on Saudi’s oil field didn’t affect the market sentiment substantially post-Monday – (e.g. INR and IDR, currencies with high negative correlation with oil supply, spiked up initially but quickly reversed throughout the week despite higher oil prices by 5.9%).
S&P500 was slightly down (-0.5%) together with the US10yr yield (-17bps) for the week. Fed cut the overnight rate by 25bps as what had been fully priced in, but what was interesting was that the dot-plot showed a mixed bag of Feds’ views on where the fed fund rate should be for the rest of 2019. It means that we could potentially expect more hawkish guidelines than what has been priced by the market (another 25 bps by the end of the year).
Hence, we could possibly see another dollar squeeze towards the end of the year, if it stays at this level or lower as we still see EM bond inflow in search of higher yield. IDR bonds, for example, still offer attractive yield above 6% for 1-year tenor, while the tendency of the currency depreciation can be potentially offset by domestic/off-shore NDF arbitrage and its economic stabilization post-election.
Nevertheless, we still see the lurking threat of higher USD from funding liquidity, the scenario where US-China talks turned sour, and the possibility of no further rate cut from the Fed. These factors, if they occur around the same time, can drive the US dollar to a new high and cause another wave of risk-off sentiment with lower stock prices.
Last week we already saw such confluence factors cause a dislocation of repo (money market funding) market where the Fed was forced to inject 75 billion worth of daily injection. This may continue to early October at Fed’s disposal to quell any funding stress (due to corporate tax payment, treasury auctions, and clients bond selling that happened at the same time and hence squeeze the liquidity).
It would be more tactical to trade on the range with more biased towards risk-off (long USD, long defensive stocks, etc.) when the safe-haven assets get too cheap, for example when we see market euphoria due to Trump’s positive lone tweets without validation or backing from China side.
Eurozone PMI, US GDP, and US durable goods orders are important economic data to watch out for, while we expect RBNZ to maintain its rate on Wednesday and stay dovish in-line with other Central Banks.
