How sustainable is the markets' new-found sweet spot? How sustainable is the markets' new-found sweet spot? How sustainable is the markets' new-found sweet spot?

How sustainable is the markets' new-found sweet spot?

Mahesh Sethuraman

Sales Trader

Summary:  Apple’s slashing of revenue guidance is merely the start of the margin squeeze cycle for US firms.

The New Year began with an extension of December’s mayhem, but the downtrend finally met worthwhile resistance as a confluence of factors propped up sagging risk sentiment. It started with China’s RRR cut – part liquidity adjustment ahead of the Chinese New Year and part easing rates in response to further signs of a coming economic slowdown – and was followed by a bumper nonfarm payrolls report confirming that US growth momentum still has legs.

The clincher came from Federal Reserve chair Jerome Powell, who left no scope for ambiguity when he said that the Fed is listening to the mood of the markets and is committed to policy flexibility. The two rate hikes for 2019, priced in by markets as recently as September, consequently appear impossible. Equities were happy to finally see some evidence for ‘the Powell put’ and rode the high to post a decent recovery from their Boxing Day lows.

It is an interesting thought experiment to wonder what the market’s reaction to the bumper NFP print would have been had the release not been followed by the dovish comments from Powell. By all measures, it was a rock-solid print. The headline number was a whopping 301,000 (versus a 161,000 consensus) and the past two months’ revisions came in at +58,000. Average hourly earnings ticked up to 0.4% and 3.2% annualised and that brought more participation (63.1%, the best since 2014) in the labour market, resulting in a higher unemployment rate at 3.9%.

Such strong data certainly reduce the odds of recession, but simultaneously build a strong case for the Fed to march along on its dot plots this year, especially if we see a consistent uptick in earnings growth.

Powell’s dovish tilt has acquired greater significance as it came after the data were published. The Fed chair still sent out his dovish message, closing his speech with a decisive hint as to the Fed’s flexibility on policy (both rates and balance sheet) and its intention to listen to markets.

Hints of a Fed pause and a strong US data print are perhaps the only factors that could have triggered a recovery in an increasingly gloomy market, and that is precisely what the markets received.

But how sustainable is this sweet spot?

Given that Powell has backtracked on his “we may go past neutral” comment from October, as well as his “we have balance sheet runoff on autopilot” comment in December so decisively, the Fed reverting to two hikes this year is unlikely to happen even with further strong jobs data. But with the market already pricing in practically no hikes in 2019 – the odds of a cut in December 2019 stand at 24.5% right now – there could still be a gap between the market’s interpretation of a dovish Fed and Powell’s idea of quickly altering policy in reaction to markets.

While I acknowledge a compelling case for USD weakness on this premise, I would take all the high-conviction short USD trade recommendations floating since Friday with a pinch of salt until further cues of a definitive, year-long pause emerges from the Fed and Powell.

On equities, the current optimism is reasonable given the scale of markets’ correction in December (with the SPX even entering bear territory for a brief while on December 26) and US stocks tactically remain a good long option for further gains. While a Fed pause and progress on US-China trade talks might provide much-needed support to the markets, the fundamentals of a late-cycle slowdown in US as fiscal stimulus fades is a stark reality facing the markets in 2020 and 2021, if not later this year.

With China unlikely to make a V-shaped recovery from its slowdown even with further monetary easing, and a possibly compromised trade deal with US, the gestation period of China-driven global growth recovery is still quite long. There is also the evidence of rising wages at home in US coinciding with a broad-based slowdown in US to consider; in our view, Apple’s slashing of revenue guidance is merely the start of the margin squeeze cycle for US firms and not the end.


The Saxo 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 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 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 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 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 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 (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

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