Why was it that made the stock tumbled last week ending on Friday? Two words – Fed and Trump!
FOMC minutes indicated that the previous rate cut was done as insurance to the economy. This disappointed the market greatly. The market thinks that this time the Fed underestimates the weaker global growth to maintain such a hawkish posture.
The Fed understandably used the latest economic headlines that still are showing resilient numbers such as the stronger than expected retail sales. The problem is that the market starts pricing in such number the anticipation of upcoming worse upcoming trade climate, akin to stocking extra corn pile before winter.
In any case, the Fed’s stance is to drive the decision based on the current data which causes Trump’s fury. Trump, while keeping attacking the Fed for not cutting rate aggressive enough, doesn’t help his own cause. Trump obviously needs the stock market to outperform to boost his support in the next election, but his recent bout with China increasingly made the market more anxious than ever.
We saw another explosion last Friday when China imposed a newly scheduled tariff on $75B US goods, to which Trump retaliated by rising his tariffs in October and December by 5pct after the stock market closed. S&P500 dropped about 1.5% and closed at 2847, US10yr yield dropped about 2 basis point near its lowest level to 1.53, gold futures climbed higher to 1526.96 (+0.8%). The bet on the 50bps rate cut (as indicated by Fed Fund Futures) on the next Fed’s rate decision, however, dropped since a number of Fed members sounded slightly hawkish in their speech.
Treasury curve (2Y-10Y) is still inverted close to -0.2 bps, but by now it’s an old story as the US-China trade headlines eclipse almost everything else, except Fed’s decision. Given Trump’s tariff increase was mentioned after the market closed, on Monday we are likely to see another wave of risk-off trades across stock, bond, and currency markets. The outcome of the awaited Jackson Hole and G7 meetings will also be monitored closely by traders.
Next week economic data are relatively light so all eyes will be on the news, headlines, and tweets around US-China trades. The market is going to be choppy, and if one likes to be trading during this market condition then tactical relative value trading with tight range and a smaller stake is probably a safer bet. The market can really go either way this time around and strong conviction is probably not warranted. Look for the side of the ‘pain’ for a better risk-reward trade.
