Is a new policy panic on its way?

Is a new policy panic on its way?

Equities 7 minutes to read
Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  As sentiment slides amidst rising trade tensions, the focus is shifting to the Fed.


Sentiment in global equities is weaker today following yesterday's remarks from the editor-in-chief of the Global Times (a major outlet close to the Chinese government), who commented China is seriously considering weaponising its rare earth mineral production against the US.

Such a move would be a game-changer, and would strike a major blow against Washington.
Global Times
US technology stocks are lower and the 7,000 level in the NASDAQ 100 future is no longer a distant idea. There are many things happening across different markets, and they all signal that something is not right. Also, ArcelorMittal shares are down 4% in today’s session after the firm announced cutting its European steel output – a sign of weaker economic activity.

There is so sign, meanwhile, of a Chinese rebound, hence our macro theme of "false stabilisation". It’s very likely that Q3 will see a new policy panic as policymakers realise that a global recession is drawing close.
NASDAQ 100 continuous future
NASDAQ 100 continuous future, source: Saxo Bank
South Korea flashing ‘red alert’

Today’s session was brutal in South Korea, taking the country’s equities into negative territory for the year. This continues to be a clear confirmation of our our "South Korean canary in the coal mine" analysis first released two weeks ago.

Judging from the positive price action in the Chinese CSI 300 index, it is clear that traders expressing a negative view on the US-China trade war should steer away from China and instead use indirect methods (South Korea, JPY, bunds, oil, Asian currencies etc.) of gaining exposure.

We remain negative and defensive on equities and believe South Korea shows that global leading indicators will continue to decline. The probability of a global recession, meanwhile, continues to rise.

If anyone tells you that an 8.3% decline in South Korean equities this month is nothing to worry about, he or she is simply ignorant.
KOSPI 200 index, source: Saxo Bank
KOSPI 200 index, source: Saxo Bank
Federal Reserve to make a panic cut in September?

The US yield curve is flat as a pancake and the three-month/10-year inversion has worsened dramatically in recent weeks. The US two-year benchmark yield is now 32 basis points below the Effective Fed Funds Rate, or EFFR. The market is increasingly pricing in a Fed rate cut, with the probability now standing at 58% for the September meeting.

Given the current spread between the two-year and the EFFR, a 25 basis point move would be pointless. It will be 50 basis points at minimum, and could go as far as a 75 bps (an outrageous prediction, but not impossible) move to get ahead of the curve.

It's crucial to remember, though, that every time the Fed begins cutting the Fed Funds Rate it means trouble. It means that the US central bank is forecasting a recession. More importantly, the Fed is always late, so a cut means that recession is right around the corner.

Watch the US yield curve as guidance for where things will go next, and also note that the Japanese 10-year yield touched -0.1% in today’s session.
FFER vs. two-year US yield, source: Saxo Bank
EFFR vs. two-year US yield, source: Saxo Bank
As an aside, or perhaps continuing the discussion of poor forecasting, an announcement from the US Food and Drug Adminsitration yesterday raised the question of how highly we should value the ability to erase past excesses.

Is tattoo removal big business?

Yesterday saw medical equipment company Soliton receive FDA 501(k) clearance for its Acoustic Shockwave RAP (Rapid Acoustic Pulse) device. Recently, the company’s device was awarded "Best in Show" by the American Society for Laser Medicine and Surgery. Soliton shares gained momentum throughout yesterday’s session and into extended hours, ending the day 149% higher as of the New York bell and 243% at the close of extended hours.

There is scant research available on the global tattoo removal market, but one study by Technavio estimates it as having a value of around $2.85 billion in 2021. The key drivers are that it’s becoming easier and less intrusive to remove a tattoo. In addition, the trend of increased health consciousness could potentially lead to a decline in the popularity of tattoos if related concepts like purity or cleanliness climb at the expense of ones like adornment or self-expression.
Soliton
Soliton, source: Saxo Bank

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.