Macro 7 minutes to read

Macro Digest: The art of making no sense

Steen Jakobsen

Chief Economist & CIO

Summary:  It took markets months to price in a China-US trade deal. It took President Trump two tweets to throw them into chaos.


President Trump's decision to reignite the China-US trade war with new tariff threats is a game-changer. Something shifted over the weekend, and we doubt that it can be healed again overnight; as such, we see some risk of a downside correction in financial markets.

Beijing slashed its reserve requirement ratio ahead of today's opening bell, but mainland equities still plunged by more than 7% in Shenzhen. At the moment, there is precious little information being offered to Chinese investors, but we believe that the authorities will step in with support one way or the other. The A-shares rally, after all, has corrected 50% since April and there is an old rule of thumb among Chinese market watchers: the faster it falls, the better it is ("better" meaning "more likely to attract significant intervention, of course).

Trump's fanning of the trade war flames not only derails some of the premium built into the expected conclusion of the deal, but also makes the upcoming G20 summit in Japan that much more crucial given this latest injury to "high globalisation"-era pratices.

(We hear that Washington is preparing a massive broadside against the World Trade Organization, with globalisation itself set to bear the brunt of the impact.)

In terms of our own macro view, we're holding the line: it's all about The False Stabilisation.

In terms of action, we are moving into capital preservation mode – long volatility with reduced exposure to globalisation-sensitive equities.

For more on Saxo's Equity Outlook, be sure to check out Peter Garnry's latest update.
This is politics in 2019: Trump tweets, and media (read: Bloomberg, the Wall Street Journal and the Financial Times) rush in to measure the carnage.

As noted in the linked FT article, the president's latest tweets "marked a big shift in rhetoric" concerning the trade dispute.

Beijing's decision to cut the RRR before market open (and before the 7% plunge in Shenzhen) was also a key shift in signal value terms...
Source: Bloomberg
The A-shares market has "corrected" 50% of its upward move in eight – eight! – sessions...
Source: Bloomberg, Saxo Bank
Despite the mayhem seen in markets, however, Chinese media were notably silent on the situation.

A look at the front pages of two major mainland portals shows a curious lack of one Donald J. Trump, while the Global Times' stocks section states that "investors need not panic".
Source: Global Times, China Daily
The landscape is volatile, but the conclusions drawn in our April 23 "False Stabilisation" outlook remain firmly in place:

• Reduce overweight in China.
• Expect rising USD and US yields from here…  DXY @ 97.39 and 2-year @2.39 and 10-year @2.59.
• Equity market should go flat over summer – real risk starts in late July/August when both policy actions and actual data will show none to little overall improvement in economic growth.
• The coming month will be called: The False Stabilisation which most likely will lead to eventually stagflation, driving MMT in Q4 when national government will boost spending, tax cuts to “replace European Central Bank lack of transmission” after a decade of zero interest rates.
• Volatility should start rising from here – higher US dollar, less liquidity (vis-à-vis Q4 and Q1), higher personal tax payments in the US plus huge increases in EM-consumption and the cost of energy makes the market very predictable in our view.
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 is not intended to and does not change or expand on this. 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-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
Rooms 2001-02, 20/F York House
The Landmark
15 Queen's Road Central
Hong Kong

Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 Queen's Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.