Are the stars gradually aligned for a weak third quarter?
A day after the Fed meeting, the Trump administration raised the tempo on the Sino-US trade negotiation by slapping another 10% tariffs on $300 billion worth of Chinese imports. Rightly, markets are spooked by the increased aggressiveness of the negotiation.
Prices slumped; investors chase haven assets. US key stock indices, after a post-FOMC rebound, re-tested their weekly lows. Meanwhile traders piled into gold, Treasuries, and the Japanese Yen – assets that typically appreciate during turbulent market movements.
For example, gold was trading near $1,400 until Trump’s announcement. Prices spiked immediately to $1,440 and formed the classic bullish engulfing candle – a pattern where today’s trading range is greater than yesterday’s and that prices closed right at the top (see Featured Chart). Unless countermanded today, this pattern usually leads to an upward drift in the near term.
For iShares Treasury ETF (TLT), it rose for the second consecutive session and closed at its highest level in months (see below). Prices have been trending nicely along the 50-day moving average for some time. The smoothness of the trend provides great confidence to traders holding the instrument.
Turning to the Japanese Yen, clearly the market consensus is to hold, add, or buy the currency. This FX rate has been appreciating against a wide range of currencies over the past 18 months, including USD, GBP, or EUR. The latter has been locked in a grinding downtrend (weaker EUR) – a trend that is now accelerating into new multi-year lows (see below).
In sum, markets are projecting some turbulence ahead. Trade wars, No-deal Brexit, a slowing global economy – are just some of the negative factors moving to the forefront. Interestingly, US equity indices are trading near record highs. Whether stock markets will endure a sharp selloff later, like the one in February last year, should not to be ruled out. Be prepared.
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Jackson has over 10 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.
Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University.