A very ordinary Monday with market sentiment skewed towards risk-off. With the ECB meeting Thursday investors are taking time to reexamine strategies. Asia equity markets are broadly in the red highlighting the negative macroview. The conversation over stock markets reversal-point continues to gain traction. Our overall thought is that the fate of stocks markets will be determined more by financial conditions then business cycle. Global growth has been riding a wave accommodative monetary policy and fiscal stimulus, which allowed investors to overlook negative macro developments. Sending asset prices to clear bubble territory. But in the face of expected tightening in financial / credit conditions, slowing China, trade tensions, geopolitical stress is now taking a toll on investors psyche. Not to mention the sane strategy of locking in a returns before a broader correction wipes out 9-months of hard work. It’s hard to image another alternative senario then a significate equity correct. Although as slow deflation is preferable to a pop (cant help remembering the Feds history of bubble-popping). JPY and CHF gains continue, highlighting investors’ concerns. Both USDCHF and USDJPY are nearing range support. Higher US bond yields and stronger labor market report will keep the USD in demand, despite Trumps threats of more tariffs on imports from China. The Fed is likely increase rates on September 26th and debate of a further hike in December, currently priced as a 70% probability.
EM Crisis.. not likely
EM currency remain under pressure despite heavy devaluation of the past month. Investors have focused on foreign debt holdings to pick winner and losers. Foreign debt in EM have rising significantly in the past few years after a long period of decline. With funding cost expected to rise further, countries Turkey and Argentina are in extremely delicate situation. While Mexico, Russia and South Africa are less critical but still worrisome. Yet overall, its unlikely that the situation will spiral in a direct currency crisis. We anticipate that extended volatility in EM countries will further decelerate proving a short term opportune to short vol.
