After a tumultuous period of trading on financial markets is a turning point about to be seen? If so, how long can it last? We consider the outlook for forex, equities and commodities in the coming days.
With President Trump escalating the trade dispute with China, market fear has cranked up several notches in the past two weeks. This has resulted in a significant inversion of the US yield curve. You will get over 2% yield lending to the US Government for 3 months. This is over 50 basis points better than lending for 5 years (c. 1.50%) and over 30bps better than lending for 10 years (c. 1.70%). This inversion reflects a growing fear of a US recession. The US 10 year yield has dropped 30 basis points since Trump’s announcement. Safe havens have been the trade, with Gold soaring over $100 higher and strong yen and Swissy outperformance on forex majors. We do not see the trade dispute calming down any time soon, and as such we continue to see the medium to longer term outperformance of gold and the yen ongoing, with near term unwinding moves being a chance to buy. That said, there are a few signs this week that a near term consolidation could be coming. As the dust settles on the latest escalation in the trade dispute, this may give rise to profit-taking retracements. However, we continue to see these as counter trend moves amid the longer term outperformance of safe haven assets. We believe that the dollar will be caught in the middle ground of the spectrum of risk on this. With the euro taking on increasingly safe haven characteristics in the past week, and the pressure mounting on the Fed to cut rates further, tightening interest rate differentials will hamper the dollar’s ability to outperform, leading to an increasingly mixed period of performance.