It is another risk off day in the markets as there is nothing to celebrate for investors when they look at the German inflation data which came bang in line with expectations. The data printed the reading of 0.5%.
It seems that the market participants are facing headwinds from all directions. Argentinian assets (the Peso and stock markets) plunged yesterday after the president faced a shock defeat in a primary vote and the situation over in Hong Kong has become worse. This idiosyncratic risk is weighing on sentiment and this is keeping investors on their toes.
The probability of the US economy falling into a recession is no longer a remote question. This is because the cocktail of risk is a major qualm among investors. The evidence of risk off trade can be seen by looking at the 10-year US Treasury yield, it is constantly making record lows. Obviously, the US yields are still positive as compared to European yields, and investors want to take advantage of this opportunity. Everyone wants to park their money in a country which is in a relative better place.
Nonetheless, there are two chief reasons which have spoiled the party for the bulls:
Firstly, the tech stocks, FAANGs, have provided a lot of tailwind for the major benchmark indices in the past. However, traders are no longer convinced that these tech stocks are going to have the same impact going forward. The reason for this is increase in scrutiny of these stocks by the US officials especially on the likes of Facebook and Google. We also now that the President of the United States, Donald Trump, has also turned his attention to these particular stocks, and it isn’t a good one.
Finally, another sector which has provided a lot of strength for the bull rally has been the banking sector. Again in a low yield environment where central banks have adopted an ultra-dovish monetary policy, and the trading revenue of major investment banks has a major question mark on it, it seems unlikely that any strength can have an impact on the bull sentiment.
Ask for the currency market, the focus is on Sterling. The UK’s economy slipped into contraction territory by reporting a number of -0.2 percent, First monthly contraction going back all the way to 2012. Of course, there was an element of front loading due to the previous threats of Brexit deadline, however, no one expected it to be this worse. Hence, the Sterling dollar pair is sitting at 1.20 mark, not far from touching the Brexit referendum low of 1.1841. Given the risk of a no deal Brexit, I believe that it is only a matter of time before the currency reaches the July 2016 low.
