The market became more unpredictable last week as US data exhibited a weaker trend recently while market participants were still hopeful on a better sentiment coming from the US-China relationship.
The market became more unpredictable last week as US data exhibited a weaker trend recently while market participants were still hopeful on a better sentiment coming from the US-China relationship.
The overall macro sentiment still remains the same as S&P500 has barely changed, while 10-yr yield and oil futures have been hovering near a recent low. As Fed’s cut in July has been properly priced in, there’s probably not much upside anymore now in the US stock market as long as the trade war doesn’t get better.
We saw that on Friday, US retail sales data – not too shabby number – had actually caused a slight drop in the stock market and made US yield bounce, an immediate effect of lower traders’ conviction on Fed’s cut (OIS swap market should be now pricing Fed’s cut below 80% probability). It goes without saying that FOMC meeting outcome this coming Thursday will be of paramount importance, to gauge their guidance and interpretation of seemingly weak US data over the course of the past few weeks.
Nevertheless, as we mentioned above, it’s really hard to see any upside in the stock market at the moment – why? Now we have seen tech companies have been impacted by Huawei saga, and ironically the 25% tariff imposed by Trump will actually damage US-based medium size tech companies and as we know, tech companies have been the biggest driver of the gain in the stock market for the past few years.
Hence from a risk-reward perspective, it’s clear for us that holding short position might give a better edge, not so much from that it has higher odds of going lower than higher, but it’s more from the intensity of the move if the market decides to dump stock if Trump and Xi Jinping can’t get into an agreement (now there’s even a rumor that Xi might not want to meet Trump in G20 summit). Other important macro headlines next week will be German’s Zew number (Tuesday) and PMI number (Friday) to gauge the growth outlook on the other side of the continent.
