Risk Off Deteriorates, More Work Must Be Done In Equities

The State of Affairs in Financial Markets 

Tentative signs of a crack in this year’s ‘risk on’ conditions appear to have returned, even if it’s still quite premature to place too high one’s bets on follow through tendencies off the bat. Even if the flows have clearly reverted into a short-term ‘risk off’ mode, one should exercise caution as all we’ve seen is a break below the 5-DMAs in most risk measures.

There is still more work to be done to orchestrate a true turn in the constructive market rhythm present in 2019 by a fracture in the short-term bullish cycle in US equities, combined with a downward slope in the 5-DMA. This pattern should then morph into US fixed income, vol, US credit (junk bonds) to strengthen the ‘risk off’ notion.

Nonetheless, there are some reasons to be concerned about Tuesday’s price action as the S&P 500 suffered its worst losing day this year, down by more than 2.5%, as investors flock back to the safety of US bonds, bid up volatility and dump credit (junk-type). The spike back above the 20% mark in the VIX won’t be a welcoming event to appease the growing signs of unrest in the market place either.

The outperformance of the Japanese Yen, leaving aside a strong Pound as a worst case ‘hard Brexit’ scenario is rapidly being removed from the equation, is also a reflection that the market is worried where the Sino-US trade talks stand. Flows suggest the negotiations have reached an impasse.

I’ve argued that a deal may eventually come to fruition as it’s in both countries’ interest to create economic stimulus, which is precisely what the market has been discounting judging by the rapid recovery see in the risk profile this year. However, negotiations in contentious issues at the core of China’s strategic vision (telecommunications, technology) were always going to create more friction. The two countries are walking through a tight rope trying to project messages of calculated optimism even if the levels of trust between the two countries is at all-time low levels.

We all know the story driving markets in January orbits around a prolonged resolution in the US-China trade stand-off, so it is no surprise that the pendulum has swung back into the risk-off side in the last 24h after a flurry of negative headlines. It all started to turn ugly when in the Asian session we learned that the contentious issue with Huawei’s CFO Wanzhou Meng is not getting any better after the Canadian press revealed that the US will proceed with a formal request to extradite the executive and daughter of Huawei’s Founder, China’s largest technology company. Ever since the case came to the public spotlight, the market has been quite sensitive, treating Ms. Meng’s related headlines as a proxy to gauge the possible evolution in the US-China relationships, hence a satisfactory deal in trade.

One could also blame an unexpectedly gloomy outlook by Chinese President Xi at an unusual meeting with business leaders as a reason to dent the risk profile. In his speech, Xi implied that the country is in shaky grounds and that even if this week’s data dump out of China saved the day by coming in line with expectations, the country may be decelerating at a faster rate than what the numbers are telling us. The comments contributed to the reinvigoration of risk-off flows, as did yet another sanctimonious-toned tweet via US President Trump. You could also throw into the mix the IMF downgrading the global growth outlook, even if that’s yesterday’s news today.

1 2 3 4
View single page >> |

The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.