Head of Equity Strategy
Summary: The rally in S&P 500 ended quickly as China denied any phone call over the weekend wanting to start trade negotiations. US equities are boxed into a corner and the next move is likely be big. Meanwhile signals coming out of China, South Korea and the US are pointing to more weakness in the global economy. Can equities keep the spirit high despite mounting evidence of a slowdown?
US equities rallied back yesterday on Trump’s tweet that China had called the US over the weekend to start trade negotiations again. But why would they do that one day after raising tariffs? It makes no sense and the market is sensing that too. China is committed to fight as is the US. This will be a prolonged trade war and potentially with no winner and no deal. The world is resetting.
The price action in the S&P 500 yesterday confirmed that the S&P 500 has strong support in the 2,800 to 2,830 area, but on the other hand the 2,940 level seems to be the upper limit for now. In any case, the S&P 500 is boxed into a corner and the next move, whether up or down, could be quite explosive.
Yuan fixing sends a message
PBOC changed its daily yuan reference rate more than expected overnight to stabilize the market. China is actively using the currency to offset headwinds from additional US tariffs. It shows China’s determination to continue to fight the US in this prolonged trade war that continues to throw volatility into markets. The weaker Chinese currency is hitting emerging market equities the most as Chinese equities are the biggest component (32.2%) in the benchmark index. Emerging market equities are down 7% in Q3 compared to 3.5% for developed equities.
Chinese equities naturally rallied on the weaker currency as it lifts growth prospects at the margin. For local investors the weaker currency creates short-term momentum for foreign investors it’s not a delightful development and Chinese equities in USD terms have also struggled since the peak in April.
KOSPI 200 is still in bear market
The leading equity index in South Korea, KOSPI 200, is still in a bear market down 26% from the peak in early 2018. Contrary to the MSCI World Index, KOSPI 200 is down for the year and has lost a staggering 8% in local currency the past month indicating no relief in the global economy.
For more than a year we have extensively been highlighting South Korea as a good proxy for how Asia and in particularly China’s economy is doing. Exports to China are stabilizing but still weak compared to a year ago. South Korea’s exports to China have not moved much in the past five years. Instead of interpreting this as weak Chinese economy for five years it is likely tied to China’s efforts to build up its own semiconductor and automobile industry slowing the needs for imports from South Korea.
Adding more salt to the wound, South Korea’s consumer confidence index fell to the lowest point since January 2017 and is now at levels not seen since 2009.
Chicago Fed National Activity Index
The most broad-based coincident indicator (tracking 85 time series) on the US economy is the Chicago Fed National Activity Index (CFNAI). July number was published yesterday and showed an ugly turn lower in July just as economists believed the US economy was firmly rebounding from April’s low point.
CFNAI continues to paint a picture of the US economy operating below trend growth although stabilizing somewhat. But the indicator stands in sharp contrast to picture delivered by the US President. The USD liquidity squeeze in global financial markets combined with the US economy operating below trend growth and no imminent inflationary pressures warrant lower rates which we believe the FOMC will deliver over the next two months.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
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