City Index | Sep 05, 2019 17:34
These conditions may be the best that risk buyers will see this quarter
Brexit, Hong Kong, Italy, U.S.-China trade. These geopolitical situations are no longer like the Four Horsemen of The Apocalypse for global market risk seekers, though few will conclude that their many dangers have receded entirely. For now, quadruple de-escalation is what’s behind world shares setting up for their first fortnightly gain since mid/late June. This comes hand in hand with a broad downdraft for the dollar. Like for shares, though in the opposite direction, the greenback is still set for its biggest slide since the third week of June.
It’s a strong indication that the dollar is taking a break from a ‘safe-haven’ phase that saw it come close to setting fresh 2019 highs. A softening dollar suggests any continued swing away from risk aversion would have strong cross-asset backing. Tightening global financial conditions implied by the trade weighted dollar’s 8% advance since early February 2018 were an integral part of the deepening malaise of the last few months.
Absolute change chart: Bloomberg US Dollar Index and MSCI All-Country World Equity Index Futures (continuation) – weekly
Source: Bloomberg/City Index
Reduced anxieties can also increase perceived benefits from expected monetary easing. Signs that the U.S. economy is topping out have continued in the most up-to-date available. A ‘goldilocks’ set of ISM servicesector data in August barely plays against another round of Federal Reserve loosening, with Fed fund futures suggesting another cut in September is almost 100% certain. All ISM Non-Manufacturing components were strong apart from the employment gauge. It remains to be seen whether that outcome will be reflected in Friday’s payrolls data. But at this stage, it would take an outsize NFP beat relative to expectations to sow doubts about a September Fed cut.
Nevertheless, the hard part still lies ahead for investors. Now, the recovery of risk sentiment must be sustained. Yet the odds remain stacked against trade, Hong Kong, Brexit and Italy calming down on a sustained basis.
Prime Minister Boris Johnson’s week of defeat over Brexit is possibly the least reason markets have to celebrate. Sterling is buoyant as the chances of Britain leaving the European Union without an agreement have ebbed. However Parliament has shown a remarkable inability in recent months to decide on the course of Brexit it does want. That is why the type of no-deal Brexit it doesn’t want keeps coming back.
A similar lack of consensus will probably haunt UK politicians for several more months. So even if they succeed in forcing PM Johnson to seek a three-month extension, what then? For one thing, there’s a big chance of a snap election. A government that has lost its mandate can’t continue for long. And if there’s one thing sterling and broader risk appetite fears as much as a hard Brexit, it’s an election that could pave the way for political forces unknown or distrusted.
That leaves at least three out of four of the long-standing challenges for risk appetite still capable of playing havoc in the final quarter.
And as we have seen, if animal spirits become less care-free again, relatively tight dollar conditions can only tighter.
Furthermore, monetary authorities that have provided policy comments in recent days have surprised on the hawkish side. It’s beginning to look like stimulus hopes are getting out of step with the extent of easing to come. Likewise, the Federal Reserve’s new loosening cycle is accompanied by ambiguous commentary. The relaxed pace of economic moderation seen in the U.S. implies that tension will continue.
The ECB’s incoming President has also adopted a less than outright dovish tone.
Thursday’s risk asset bounce reflects relief that potential disasters are receding. Major uncertainties remain though and policy pricing could use a second look.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation, and needs of any particular recipient.
Any references to historical price movements or levels are informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.