US equities were stronger Wednesday, the S&P 500 rising 1.5% following gains in Europe and a mixed session in Asia. Oil prices fell by 4.5% after an unexpected rise in US stockpiles, and on reports Russia may ease up on supply cuts. Better sentiment elsewhere is pinned, it seems, on reopening optimism but also comes despite lingering geopolitical tensions. The US Secretary of State, for example, has indicated that the US no longer considers Hong Kong as autonomous from China.
As the equity market rally continues, the once-extensive laundry list of things investors cared about is dwindling by the hour. You can add renewed concerns about US-China relations and unrest in Hong Kong to that list of things the market seems to care little about.
But one would have to think investors will be especially sensitive to any hint of US tariffs on imports from China.
In the meantime, the incomprehensibly large global stimulus will continue to bolster risk sentiment as the market attempts to compartmentalize trade war risk from the reopening narrative. However, a ~7% drawdown in the S&P 500 during the week following the last major trade tiff, 1st August 2019, bears noting.
A shift through 7.20 USDCNH seems likely in the near term, which could then drive underperformance in CNH-sensitive currencies, such as KRW and TWD, at the primary level of escalation.
It was a testy open for US equities on Wednesday as the S&P 500 e-minis finally succumbing to a nosebleed and altitude sickness above 3000, likely due to US-China-Hong Kong ruckus. But as has so often been the case on dips, stock market bulls are quick to send out metaphorical postcards to Wall Street bears adorned with a picture of Fed Chair Powell reminding the bears never to take on the Fed.
Indeed, it’s the powerful Fed policy stimulus that could protect risk assets from a trade war selloff this time around.
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Two-year yields have covered their prior six-month range in the last week alone – and whether or not this move is sustainable matters a lot