Last week should have marked one of the tumultuous market actions we have seen recently. The question is if we are going to see more of such events in the coming months which is certainly would not be good for risky assets, including stocks
The turmoil in Argentina triggered the negative sentiment last Monday as Macri, the incumbent president, who is perceived to be Argentine’s economic savior in the past few years of growth, lost the election to everybody’s surprise. The stock index (S&P Merval) dropped 48% on a day, second-worst day in its history, and its Peso currency dropped by 15% against US dollar – after which a couple of rating downgrades follow suit. People remember history (and hence trading opportunity) as Argentines were pulling cash and its Central Bank intervened in the FX market, causing the country’s foreign reserve drop by more than 2.5B US dollars. This time however the crisis in Argentina only brought limited impact to the Emerging Market universe as investors know better these days and acknowledge Asian EM as the source of growth and high yield.
Nevertheless, worse than expected China’s Services PMI data still weighed in on the sentiment. This risk-off sentiment reversed on Tuesday as Trump postponed the tariff on $300B to mid-December, causing US stocks to jump by 2% and USDCNH to drop 10 big figures – and boom! – It dropped again by more than 3% the next day. What happened? Market buzz and media blamed this on the 2-10yr UST yield inversion and 30yr UST breaching below 2%. Curve inversion is often taken as an indicator of looming recession indeed, but has it been the cause of this massive sell-off? It’s hard to tell as there were many instances in history where the inverted curve was actually followed by higher stock prices 3-6 months afterward.
To make the color more complicated, S&P 500 index actually rebound more than 2% from its Thursday low and closed at 2888.68 level on Friday.
An old adage says that Bulls and Bears can make money but Pig gets slaughtered, this can happen in a trading environment like this where political uncertainty is still very high (China promised retaliatory measure if the US is even considering on new tariff and market is trying to predict Fed’s move in September).
The current market presents a very risky situation for those trend-following traders as it gets choppy. Relative value trading and safe-haven assets (gold!) is probably still the best way to navigate the market in the coming weeks.
High volatility like this, if history is to repeat, is generally not good for bull trend and hence it’s probably better to stay away from growth and low EPS stocks until we have a clear direction, at least on the political front and Central Bank stance (it’s clear that Central Bank except Fed around the world want to deliberately weaken its currency).
Next week’s focus will be on further interaction between the US and China, Eurozone Manufacturing PMI, and Jackson Hole over next weekend.
