Market Review 08/2019

US-China trade games, Jackson Hole Symposium of world’s top bankers, G7 meetings (which, as usual, were quite boring so we will save both paper and time and will not comment on those) and, of course, Trump’s tweets made the month of August. Boriss Johnson, too, added some volatility in the end of the month with his move to suspend parliament (and then with threats of snap elections in the very first days of September).

Tweets are an important part of the news feed

Trade war is now becoming a routine. Market participants are trying to react and operate with tweets, breaking news, pure gossips and hardly any clarity on the background that leads to elevated volatility and quite a choppy and worrisome market. It seems that at some point people will stop reacting to any additional piece of information whatsoever, so difficult it is to comprehend, analyze and make an intelligent judgement nowadays.

Yet one person, it seems, is having a lot of fun during this chaos and when trade agenda or political ideas become uninspiring, he turns to his favorite foe – Mr. Powell. Fed had a lot of heat coming its way this summer, with President not even willing to choose his words, questioning both the intelligence of the Federal Reserve and its loyalty to the country. With most Central Bankers talking about monetary easing and lowering rates during Jackson Hole Symposium, Powell was less dovish than President wanted and hence “came the fury”. It became a bit ugly, apparently, so some old FOMC members fired back with quite a harsh rhetoric but that will hardly help Jerome Powell and his colleagues should they decide to stay put on the rates in September.

Signs of recession in Europe

Back to economy. Europe’s largest markets continued to show worrying signs. France was barely growing, United Kingdom’s GDP was red for the quarter and Germany was in trouble with number of unemployed people reaching 2.29 million in August, marking the fourth month that joblessness failed to drop. With manufacturing already contracting, a labor-market downturn could tip that Germany’s economy is in recession as higher unemployment threatens to negatively affect consumer spending. GDP shrank by 0.1% in Q2 and the Bundesbank is expecting this decline to continue. Business confidence fell for a fifth month in August and consumers are turning pessimistic as well.

US economic data is mixed

Economic indicators in the United States are mixed. A decline in industrial production and manufacturing show problems in industrial side of the economy. However, retail sales performed well in July and inflation is close to the Fed’s target. However, investors are worried that the trade war between the United States and China will not get better or might even get worse. Such a situation has already negatively affected business investment and that is likely to persist. Uncertainty about Brexit, the future of the new trade agreement in North America and of automotive trade between the US and Europe are all likely contributors to investment weakness.

China continues to slow down

China keeps providing evidence that its economy is facing headwinds too. Industrial production increased 4.8% y/y in July – the slowest increase since 2002. Fixed asset investment rose 5.8% during the first seven months of the year – the lowest rate in nearly two decades. Retail sales were up 7.6% in July, which is the second-lowest rate of growth since 2003. All these indicators show that Chinese economy is growing unusually slowly.

Bond yields are trickling lower

Government yields have continued to trickle lower all over the world. US government debt continues to sport the highest yields among developed markets, although at half the rate if compared to a year ago. The yield on 10-year US Treasuries stands at 1.496% on the last day of August, while the 2-year yield is a tad higher at 1.504%. The yield curve, which showed first signs of inversion back in May, has continued to invert during the summer. This situation in the bond market is foretelling troubled times ahead for the US economy.

Meanwhile in Europe, Germany’s debt offer negative yields up to the 30-year maturity. Austria’s inaugural 100-year bond has climbed 70% this year and doubled in value since its issue nearly 2 years ago. Globally there are now 16.838 trillion (!) US dollars’ worth of negative yielding debt. Moreover, on top of that some of Denmark’s banks have started offering negative mortgage rates. This takes us into a higher (or lower?) level of the “New normal.”

Important Central Bank meetings will take place where more monetary easing actions are expected from both the ECB on September 12 and the Fed on September 18. The market bets heavily on further rate cuts from Fed and we can only guess what happens if FOMC decides to be less dovish. Still, we try to buy short term US paper shall the yield jump closer to 2.00% on any news or event.

Metals move faster than expected

Gold finally approached 1600 dollars per troy ounce level. Technically, this 1550-1580 area could be very challenging for gold bulls, having important resistance level. In addition, futures positioning shows excessive optimism as opened longs are near their record reading. Ideal scenario would be correction in the metal back below 1400 dollars mark. Attractive place to buy would be XAU/USD 1370-90 area and, as previously mentioned, 1260 is critical for gold to stay above in order to keep bullish case alive. Silver attracted most of metals traders’ attention as it did get close to 19 dollars per troy ounce mark, which we expected only closer to year-end. It was fast and impressive. 21 dollars mark is key on longer-term charts and we expect a fight ahead of that level.

GBP eyes all time low

Pound approaches last hurdles on the downside (1.2000 GBP/USD levels) ahead of all time low of 1.0560 against the dollar. Sentiment is very bearish so 1.2000 might not go easy and it is interesting to see how it all plays out. Those who need to buy GBP in near future might try to buy it closer to 1.2000, but if that level goes, “cable” is really in uncharted territory until it meets 1.0560 mark.

FOMC meeting to dictate markets in September

As expected and mentioned a month ago, August did bring back some uncomfortable moments to many market participants; and with traders returning from their vacations, we are eager to see where autumn will take us. The nearest key moment, it appears, will be FOMC September statement and press conference, after which we can expect some heavy tweets and sharp market moves.