Last week was highlighted with Trump’s tweet on possible deal delay with China, China’s frustration with Hong Kong or Xin Jiang Bills, and closed with strong US Payroll data.
The market showed significant resilience last week despite the escalating tensions between US and China amidst their trade deal [S&P500 +0.16%, US10YR yield +6bps, Oil futures +7%, gold -0.2%].
The first thing comes to mind is investors discover that allocating cash to other asset classes makes no better position than just staying in US equity for now. Even gold, the natural safe-haven asset, ended the week lower. The higher oil price wasn’t due to general market sentiment but was caused by a surprise in the energy sector after dashing Saudi Arabia’s Abdulaziz bin Salman had agreed to oil supply cut in the OPEC meeting – making the energy stock sector the winner last week.
Interestingly, in other macro spaces like rates and EM, the initial negative reaction was pretty much contained with some small rebound last week (although USDJPY was kept around the week low at 108.58 after dropping more than one big figure). The stellar NFP numbers (+266K with 3.5% unemployment rate) induced risk-on sentiment on Friday, and hence initial buying in the US dollar were followed with stronger Asian pairs.
So what could we expect from here? We think the market is going to be choppy from today onwards, as we are soon entering the festive season where liquidity can easily dry up. US-China talks will become the primary source of volatility in the market, especially as we get closer to the Dec 15 deadline for a phase-one deal before another US tariff will be enacted.
To highlight the volatility, or rather, the liquidity of the market below is USDCNH chart showing a price spike after Trump’s tweet and its reversal (even without clear positive outcome from US-China talks).
Hence it shows the danger of having a big position in trade without the ability to withstand the swings.
On a separate note, it’s worth mentioning that AUDUSD may soon lose its status as a proxy for risk-on sentiment as its correlation with US Stocks dropped from 40% (year average) to flattish for the past 2-3 weeks.
This break in the correlation may be persistent as we see more structural change in interest rate differentials. Next week we have US CPI and FOMC meetings as the macro data highlights to observe, as well as German ZEW numbers. But as mentioned above, nothing will play a more important factor in the market next week than the progress of US-China trade talks.
