How to trade the trade war
Head of Equity Strategy
Summary: The return of harsh tariff threats from Washington ahead of the expected arrival of a Chinese delegation this week has financial markets spooked, with a significant downside move probable if the VIX volatility index ticks past 22.
With historically high net short positioning in VIX futures (short volatility strategies), the market is set up for severe downside dynamics should the VIX take up the critical levels around 22 (the index stood at 17.40 ahead of today's New York bell). China’s trade negotiators are planned to arrive in Washington on Wednesday and it is very likely that Trump’s tweets are a negotiation tactic in order to press the Chinese for a trade deal sooner rather than later.But what's next for financial markets?
South Korea at odds with calm markets
We highlighted South Korea as one of the key countries to watch for clues as to where the economy is headed. The Organisation for Economic Co-operation and Development’s leading indicators are suggesting a turnaround, which could turn out to be false, and Samsung has recently sounded upbeat on demand for memory chips. The country’s exports to China have also improved considerably over the past couple of months, but is it merely set to stabilise at low-growth levels? The currency is sending a worrying signal (as it has all year, oddly), but today's price action indicates that investors are not fully buying into the 'China stabilisation' narrative just yet.
Either South Korean equities and KRW are mis-pricing risk and macro, or everyone else in global equities (mainly US equities) are wrong in terms of direction. We argued last week that investors should profit or hedge risk as we believed that equities were discounting an overly positive near-term future.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.