The stock market kept grinding higher next week with the S&P500 index closing at 2939.88, with a return above 17% YTD and above 1.2% WTD.
It’s clearly an incredible performance given the actual state of the global economy that we’re experiencing, with China is in recovery mode, the US in slow down mode, and Eurozone which may still be in a precarious state. Perhaps the reason behind this price action is not so much of investors’ optimism, but rather the lack of alternative investments.
Weaker inflation and stronger than expected GDP number last week will certainly make market participants guessing on FOMC statement this coming week, which is definitely the macro highlight. This, together with the China PMI on Monday, will become the wild card to set the sentiment next week as Non-Farm Payroll number this Friday is expected to be at least decent, seeing how resilient US data in the past few weeks.
UST 10-yr yield has dropped more than 6bps from the start of last week, indicating traders are still expecting the Fed to be tilted to the dovish side in their next statement. In FX and commodities world, we saw a risk sentiment wave went through on Thursday with USDKRW seeing a blow-up with its 1-month NDF breaching 1160 level, AUDUSD and EURUSD had another losing weeks and oil futures retracing from the recent high.
Given all of this, it makes sense to be biased long for next week as risk-reward seems to favour supportive stock market: dovish Fed + resilient data –> good stock market, neutral Fed + higher rate projection –> lower bond price and supportive stock market. Nevertheless, we will see a continuation of US-China trade talk and in our view, the unpredictable Trump is the biggest factor if risk-sentiment becomes sour next week.
