As we mentioned previously, the market price-actions last week had been largely affected by the US-China trade war and the situation is getting no better. S&P500 Index dropped 1.2% last week (although the Utilities and Healthcare index were up more than 1%, indicating the rotation into more defensive sectors as we predicted, read My Market – Retaliate 20 May 2019 Edition).
Trump was trying to choke Huawei and used it as part of trade negotiation. It’s clearly a part of political ploy despite all talks about security. China will almost certainly not yield. So it’s hard to see how long this standoff will last. But it’s safe to say that it’s probably better to avoid tech stocks or those which are vulnerable to the high-tech export ban.
US 10yr yield dropped another 7 bps and had priced in a full rate cut by end of the year. From one angle, rates and commodities (oil futures dropped almost 7%) are painting a more bleak future than the stock market. But as we discussed previously, it’s probably because the stock market will cheer if Fed, who seemingly is more concerned about inflation and asset prices now, decides to cut-rate. Until then, the stock will likely have some sort of bogus support.
Macro indicators show that fast money (hedge funds and institutional speculators) has been long USD and short EM. But we saw some profit-taking action on Thursday and Friday, primarily in the EM market. This also coincided with the strong rebound in EURUSD after briefly touched below 1.1110, it jumped quickly breaking 1.12 and will possibly test a fresh supply at 1.1250. All these profit taking actions by fast money were likely to be triggered by weaker US PMI and durable good orders. However, if the trade war is going to continue, we may see another re-entry from them on risk-off trades.
In a political landscape, we have European Parliamentary Elections unfolding while Theresa May has resigned after prolonged Brexit failure. Next week we will observe China manufacturing PMI to see how well-prepared China for the possible prolonged trade war. Until we see the light at the end of the tunnel, it’s probably better to stay with defensive assets.
Theresa May has resigned after prolonged Brexit failure. Next week we will observe China manufacturing PMI see how well-prepared China for the possible prolonged trade war. Until we see the light at the end of the tunnel, it’s probably better to stay with defensive assets.
