S&P 500 is boxed in to a corner S&P 500 is boxed in to a corner S&P 500 is boxed in to a corner

S&P 500 is boxed in to a corner

Equities 5 minutes to read
Peter Garnry

Head of Saxo Strats

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.

Source: Saxo Bank

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.

Source: Bloomberg

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.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992