The lack of Trump’s provocative tweets this week on China brought all attention to the economic headlines and Central Banks’ sentiment around the world.
Despite worse economic data last week (US non-farm payroll increased by just 130K in August vs expected 160K, and weaker US ISM Manufacturing), the macro sentiment was lifted by better than expected China Caixin Manufacturing PMI and PBOC’s decision to cut reserve requirement ratio by 50bps to inject more liquidity into the market, acknowledging the growth slowdown.
The ‘trigger’ of the risk-on trade this week was the headline on HK Chief’s announcement on the extradition bill withdrawal. The wave of relief trades was obvious across the asset classes. US stock index advanced for the week with S&P500 (+1.7%) being led by the energy sector and tech sector. Oil futures not surprisingly advanced as well (+2.5%) and gold futures (safe haven) ended the week lower at 1506.82.
In the currency space, AUDUSD made a rebound after squeezing the heavy short positioning in this pair. Some investment banks have also started to pare down their bearishness on EM assets – this is understandable as we have seen a surge of US dollar unwinding against Asian currencies last week.
Nevertheless, it’s too early to be optimistic about the risk-on trade as the signs of fundamental weakness are everywhere and the US-China trade war hasn’t had any closure but a repetitive cycle of stalemate -> provocative tariffs -> promise of another talk.
As we see on the chart below, copper price (yellow line) is still on a downtrend while the gold price (white line) is on the upward slope. This historically didn’t bide well for the actual economy.
Risk-off macro trades from the previous cycle (except in US stock) have been prevalent that we may still see some unwinding. For example, US Treasury curves 2-5Y and 2-10Y are seeing unhealthy bull-steepening (at -10.96 bps and +1.78 bps respectively) which may normalize further.
The market has apparently been pricing in more aggressively than what the Fed might consider. Next week, US retail sales and CPI, as well as Consumer Confidence Index are going to be observed cautiously to gauge the next Fed’s stance. The ECB rate decision is also due next Thursday, so EURUSD will be still heavy despite recent massive selling.
As we see stock index like S&P500 climbed higher last week without an actual change in the fundamentals, this may give a good risk-reward opportunity to long value stock and short the stock index itself and trade on the relative value strategy.
