16 to 22 September: A new hope:The US-China trade negotiations may continue in October

The last two weeks were promising, as global political tensions have finally eased through a more constructive tone between the US and China, the withdrawal of the bill that sparked riots in Hong Kong, the decreasing probability of a no-deal hard Brexit, etc. However, the developments on early Saturday re-introduced a degree of risk-aversion, when Saudi Arabia’s crude oil processing plants were attacked. The attack was disruptive with about 58% of the Saudi oil output being affected. As a result, the price of WTI crude spiked from USD 55/bbl and consolidated around USD 60/bbl in the early Monday morning trading. In our opinion, the magnitude of the abrupt price reaction implies that a political risk premium has been integrated into crude oil prices, since the disruption of supply will be likely fast overcome: there have been reports that the Saudi production could recover and a large amount of production could come back in a matter of days, the US stated that it stands ready to act if needed (i.e. tap its strategic reserves) and the OPEC+ countries can opt for the relaxation of production cuts. Overall, we see the disruption in the oil market as a transitory phenomenon.

9 to 15 September: The disruption in the oil market could be transitory

The last two weeks were promising, as global political tensions have finally eased through a more constructive tone between the US and China, the withdrawal of the bill that sparked riots in Hong Kong, the decreasing probability of a no-deal hard Brexit, etc. However, the developments on early Saturday re-introduced a degree of risk-aversion, when Saudi Arabia’s crude oil processing plants were attacked. The attack was disruptive with about 58% of the Saudi oil output being affected. As a result, the price of WTI crude spiked from USD 55/bbl and consolidated around USD 60/bbl in the early Monday morning trading. In our opinion, the magnitude of the abrupt price reaction implies that a political risk premium has been integrated into crude oil prices, since the disruption of supply will be likely fast overcome: there have been reports that the Saudi production could recover and a large amount of production could come back in a matter of days, the US stated that it stands ready to act if needed (i.e. tap its strategic reserves) and the OPEC+ countries can opt for the relaxation of production cuts. Overall, we see the disruption in the oil market as a transitory phenomenon.

2 to 8 September: As global political tensions ease, markets have a chance to melt up

The market has rebounded last week (the MSCI EM index was up 2.4% in USD on the week) on some positive news from easing US-China trade tensions to some development in Hong Kong’s situation as well as some better-than-expected US labour market data. In addition, expectations for looser monetary policy stances by the Federal Reserve, the European Central Bank, the People’s Bank of China and several other emerging market central banks’ contributed to the sigh of relief. In our view, such a market move proved that stock market performance in the last couple of months decoupled from macroeconomic fundamentals and were predominantly driven by political developments. We sustain our opinion that the global economy is highly unlikely to slip into a recession anytime soon (as opposed to the implied market pricing), especially that both fiscal and monetary authorities closely monitor economic developments and stand ready to provide a cushion. Once political tensions persistently ease, investor sentiment will improve and a sustained upswing in stock markets should prevail.

26 August to 1 September: Labour market metrics in the US to be closely watched this week

Over the weekend a new round of tariffs came into effect in the saga of the US-China trade wars. With no trade deal in sight between the US and China anytime soon, markets will need to find comfort in macro data releases. Last week, it was confirmed that the US consumer was alive and kicking, as consumer spending largely drove real GDP growth in 2Q19. This week the usual monthly labour market statistics will be revealed (including the change in non-farm payrolls, unemployment rate and earnings). Should the metrics continue to signal that the labour market is healthy and strong, the Treasury market will have a chance to dial back its pessimistic take on the US economy’s near-term growth prospects – unless US President Trump and Chinese President Xi find something new to disagree on.

19 to 25 August: Geopolitical developments to drive markets in the short-term

Last week was dominated – again – by the newsflow related to the trade tensions between the US and China. On Friday afternoon, China announced countermeasures to President Trump’s 10% tariffs on USD 300bn of Chinese goods by imposing 5-10% tariffs on USD 75bn of US imports on 1 September and 15 December. In response to the measures taken by the Chinese authorities, the POTUS lashed out at China, ‘ordered’ US companies to find an alternative location for production and raised tariffs further by 5% on all US imports from China (worth around USD 550bn of goods). Fed Chair Jerome Powell had the chance to calm the nerves of financial markets by delivering a reassuringly dovish speech at the annual Jackson Hole Symposium. Mr Powell, however, did not pre-commit to a greater degree of monetary easing. On a brighter note, President Trump claimed that trade talks between the US and the EU were on track and the parties were ‘very close to doing a deal.’ As the economic diary remains relatively empty for the week, the political newsflow could be one of the key drivers of asset prices in the short-term.

12 to 18 August: Intensifying political uncertainties weigh on investors’ risk appetite

The Trump administration took the markets by surprise as the Office of the US Trade Representative announced that tariffs on Chinese imports to the US will be delayed to the 15th December on a range of goods such as mobile phones, computers and video game consoles. However, markets remain unsure how to interpret this move in the context of sluggish German economic activity, inverting yield curves in developed markets, protests in Hong Kong, Brexit-related economic and market jitters and increasing probability of the return of a populist government in Argentina. The combined impact of these developments triggered massive capital flows seeking safe haven assets. As a result of intensifying risk aversion, sovereign bond yields plummeted and hit new historical lows in Germany and Switzerland, where the 10-year yields decreased to -0.7% and -1.1%, respectively. It will be more relevant than ever to listen carefully to the speech by Fed Chair Jerome Powell at the annual Jackson Hole Symposium (23-24 August), as the Chair’s speech will most likely shape global investor sentiment.

5 to 11 August: The trade dispute goes on

Although the economic diaries in the US and China were virtually empty last week, markets did not have time to recuperate, as the trade tensions between the US and China further escalated. A week ago we argued that the trade tensions entered a new chapter, as the Chinese renminbi crossed the psychologically important level of 7 vs. the greenback. In the new chapter of the trade war saga, the US formally labelled China as a ‘currency manipulator.’ Later, President Trump claimed that the trade negotiation scheduled for September could be cancelled. As a retaliatory measure, China banned the imports of agricultural products from the US.

The fact that the opposing sides have resorted to more aggressive retaliatory measures implies that the probability of a policy mistake-driven economic slowdown has markedly increased, in our view. As a result of the increased degree of economic uncertainty, the appetite for risky assets have abated, as investors sought safe haven assets. This week the macro data from the US and China will allow the market to re-assess the prospects for the world economy.

29 July to 4 August: Trade tensions between the US and China enter a new chapter

Events last week unfolded so fast that investors are still gasping for air. It all started with Fed Chair Powell’s post-rate cut speech, in which he argued that the Fed was unlikely to deliver a long series of rate cuts –strengthening the USD and driving the S&P500 lower. Later, US President Trump unexpectedly announced his plans to impose 10% tariffs on USD 300bn worth of Chinese goods. The President’s idea further disrupted investor sentiment globally. And just this morning, the Chinese government delivered their response by weakening the Chinese renminbi above the threshold of 7 against the greenback. The renminbi’s slide strongly suggests, in our view, that the Chinese government could have lost its patience with the US President and are not going to hold back from using more aggressive tools anymore, such as the devaluation of their currency. Therefore, we believe that the trade war saga has entered a new chapter, where the opposing sides could resort to more drastic tools than the imposition of tariffs.

22 to 28 July: The IMF foresees downside risks to global growth

The International Monetary Fund (IMF) released its latest World Economic Outlook last week, in which the IMF marginally reduced its world GDP growth forecast to 3.2% for 2019, whilst foresaw the rate of economic growth at 3.5% for 2020. The IMF pointed out that world trade growth was 0.5% YoY in 1Q19 and claimed that the rate of world trade volume growth had been slow relative to the pace seen in the previous years. Whilst the IMF’s comment on the evolution of world trade was factually correct, the organisation did not put the figure into context, i.e. that trade growth was very strong between 3Q16 and 4Q18. In this context, the slowdown in world trade growth is nothing unusual, but a recurring cyclical phenomenon. Consequently, we believe that the tone of the IMF’s assessment and conclusion is very downbeat, as it put much emphasis on downside risks to global growth and refrained from pointing out potential positives, such as the oversight of central banks globally. In our opinion, the world is a happier place than stipulated by the IMF.

15 to 21 July: The Fed has reached muddy waters and made them even murkier

Although there was a vacuum in terms of macro data releases throughout the week, we still have a lot to digest. Various Fed officials delivered speeches, in which they argued for their respective views on the next appropriate decision at the end of July. We found it rather difficult to extract relevant information out of their communique. The most controversial speech, in our opinion, was made by President Williams of the New York Fed, who strongly argued that policymakers should act quickly when faced with economic weakness. His words almost convinced the market that the Fed was prone to slash interest rates by 50bp next Wednesday. Not long after President Williams’ remarks, the New York Fed’s spokesman released a statement claiming that the President’s views were of an academic nature overarching experiences of the last 20 years and should not be interpreted as guidance for future monetary policy steps. In our view, this example perfectly encapsulates how difficult it is for anyone to form a strong view on the forward-looking path of interest rates in the US. After much deliberation, we concluded that the FOMC will opt for a 25bp cut at the end of July and will shift to a more inflation-dependent stance. Should this be in fact the case, we will likely to see a 25bp at the end of the year, bringing the Fed funds rate’s target range to 1.75-2.00%. Needless to say, we will remain vigilant and continue to closely monitor every word uttered by Fed officials.