In today’s briefing:
- China Slowdown = Reduce Risk
- Heading Towards a Currency War? US and Chinese Policy Outlooks Suggest Trouble Ahead
- How to Trade the Great Unwind
- Nowhere to Run to Baby, Nowhere to Hide! Part 2
China Slowdown = Reduce Risk
- The slowdown in China has become unmistakable. The initiatives announced after the Third Plenum did little to address the problems of a weak real estate market and local government debt.
- The effects of the Chinese slowdown are being felt mostly in non-U.S. equity markets.
- We are downgrading our Trend Asset Allocation Model from bullish to neutral.
Heading Towards a Currency War? US and Chinese Policy Outlooks Suggest Trouble Ahead
- The US election campaign has taken significant twists in recent weeks, culminating with the removal of President Biden. Wall Street cannot be ambivalent about who wins in November, unlike 2020.
- The People’s Bank of China (PBoC) has unexpectedly lowered key lending rates, following disappointing Q2 economic growth. More aggressive interest rate cuts could happen once the Fed begins easing policy.
- Exchange rate movements in Q4 could be key to diffusing protectionist sentiment against China. Easier monetary policy in Europe and the US will force the PBoC to support China’s exporters.
How to Trade the Great Unwind
- U.S. equity investors saw a sudden and violent rotation from growth to value stocks and from large to small caps. The risk unwind is also evident in the currency markets.
- In the short run, some of our short-term equity indicators are oversold and flashed buy signals.
- Our base-case scenario calls for a short-term relief equity rally into August, led by small caps and value stocks.
Nowhere to Run to Baby, Nowhere to Hide! Part 2
- Are we witnessing a short-term carry-trade unwind or a trend change?
- A short-term bounce in the USDJPY will provide an opportunity to reposition
- Industrial metals take the brunt of the unwind in the commodity sector
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