Last week the market looked serene and uneventful due to a slight recovery in the US-China relationship and less provocative tweets from Trump.
S&P500 and oil futures were up 2.79% and 1.7% respectively for the week. Gold reached its recent peak at 1542.81 before slipping down back to 1520.38. 10yr Treasury yield, however, ended up at 1.4961%, 3.9bps lower than the previous week.
While we have a bit of relief from the US-China tension, the mixed price actions signal that the underlying sentiment has become more cautious as the slowdown in global growth is now evident and we see increasingly negative economic data with surprises on the downside.
We see more divergence between short-term and long-term risk-reward opportunity, and we shall see the more mixed flow from the Fast/Leveraged Money and Real Money funds. For example, Macro Funds have been buying EM risk and selling yen as soon as Trump’s more reconciliatory tweet is met with affirmative Chinese government’s statement (US-China talk in September is now already priced in). This is, however, in contrast to Real Money and longer-term funds who now look for hedges on their risky assets.
US stocks have been performing solidly and any dovish statement from the Fed seems to support any corrective behavior recently. This is actually understandable and shows that we are in completely different market fundamentals compared to 15-20 years ago. Back then, we’d probably seen a deep correction in the stock market, which we have seen so far – the reasons? US companies have global diversified revenues and US Treasury hasn’t been in such a bubble due to QE which makes the global interest rate very low (Singapore 10yr Govt bond index MASB10Y has a higher yield than any other major developed countries!).
Nevertheless, this doesn’t mean that the stock market can’t plunge into recession, and this prompts funds to start searching for hedging alternatives and the usual suspects will be gold, USD, VIX option, CHF, etc. Next week is a shorter week with heavy data from China Manufacturing PMI on Monday, RBA decision on Tuesday, and US Non-farm payroll and unemployment rate on Friday.
At this juncture, it is very important to classify trading strategies into different horizons and manage the risk properly. A mismatched trading horizon, for example mistakenly trade the longer-term fundamentals with a stop-loss of a short-term range during this choppy market, can be fatal.
