S&P500 has made a comeback by climbing around 1% last week.
But we shouldn’t take it as a market euphoria and everything is fine. In fact, the waiting game has now started as the VIX index is supported above 17.
The symptoms of anxiety among the Central Banks globally can’t be more obvious with RBNZ delivering a 50bps cut, exceeding the consensus expectation in its bid to preempt the slowdown. And subsequently RBA denoted its monetary policy statement with easing bias and willingness to further rate cut.
AUDUSD breached a decade low (although crowded short positioning see this pair squeezed back to above 0.6800 to the delight of short-term traders before ending the week slightly lower from that level). Oil futures is slightly down at 54.50/bbl., and gold price is still hovering around 1500 level. What has triggered all this? You probably guess it right – China retaliation by allowing its currency fixing rate above 7 showed that it’s prepared for a prolonged trade war and now the ball is with US on how it wants to play it.
So far US has threatened back with Huawei pending deals and officially labelled China as currency manipulator. But Trump, who started the provocation by the new tariffs, has been relatively muted, probably taken aback by China’s response.
Now market has started to price-in more than 25bps cut by FOMC in September – one of the main reasons we still see stock market supported. But this hinges on the inflation number since one of the conditions the Fed never wants to end up with is stagflation, so CPI number is something we need to look out for – benign CPI number will strengthen the case of further cut and will be supportive to stock market.
On the other corner of the world, we see more cautious optimism coming from Asian EM market where the pursuit of higher yield and carry trade (EUR/Asia being a popular one recently) is still intact. We still take the stance where agile, market neutral, relative value trades are probably still the best play in the current market.
Next week US CPI and retail sales will be out and these are numbers we need to pay attention to closely.
