This week is shaping up to be a stinker. Last Friday, China and then the US ramped up the stakes in their trade stand-off; both countries imposing a range of new tariffs.
The result was an abrupt correction in US equities and judging by US index futures there is more to come on Monday. The contagion effect will probably rattle Asia markets on Monday morning.
In a speech on Friday, Fed Chair Jerome Powell rebuffed the US President’s call for lower interest rates as he argued that the domestic data stacks up to keep US rates more or less on hold, suggesting it is trade disputes that are causing uncertainty in markets and maintaining the Fed’s mantra of “acting appropriately to sustain expansion.”
A meeting of G7 leaders in Biarritz, France did little to increase confidence that a Brexit deal is in sight. It’s not, and “no deal” looks like more of a certainty.
So is it possible to trade these views in relatively efficient markets? The answer to this, as behavioural theorists will tell you, is that in times of fear, markets display certain characteristics that some might argue are predictable. If we take the US/ China trade war and the many instances of market-moving announcements from the US president (either positive or negative) it appears that a certain amount of equity market confidence hinges on his initiatives. Probably what has been less factored into markets is the steely resolve of the Chinese and also their intelligence and worldwide footprint. Also, the fact that the Chinese leader is here to stay, while the US President, at most, may serve for two terms. China can hang tough and impose additional tariffs. It will hurt the US more than China. At some stage, the US has to adopt a less aggressive stance towards China and other countries and start to undo the damage that it has done to world trade. Until then, World stocks will remain vulnerable.
There is time to take profit or go short US markets or rotate out of more risky stocks or China trade-dependent stocks even if markets drop another 2% on Monday. Equity markets have been in a bull run for 10 years. Picking tops is difficult but preparing for a drawdown may be prudent. As for currencies and bullion, I’ve mentioned before that in times of severe strain, smart money moves into Gold, Swiss Francs and Yen. Out of these I prefer long Gold and Yen and have been recommending these trades for nearly a year.
This week’s data, important though it is will hardly affect markets. On Tuesday we have US Consumer Confidence expected to read 129 vs last month’s 135.7. On Thursday, US 2nd quarter GDP looks set to print 2.4% Y/Y. Friday’s US Core PCE is likely to read 1.6% Y/Y for July. Other than that, analysts expect Eurozone CPI to fall to 1.0% Y/Y in August from 1.1% in July and Canadian Q2 GDP to print 1.4% Y/Y for June.
Perhaps the greatest piece of wisdom that I can share is that in general, family offices, wealth managers and savvy investors look to preserve capital rather than speculate in difficult times. Trading volatile markets are not without its risks. Risk means the potential for losses. Markets do not always immediately bounce back from technical support levels and choppy markets can quickly kill winning trades. Caution is advised.
Last Good luck and good trading! Ben Robson
Ben Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders Made Their Fortune Trading Forex And How You Can Too.
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