When a draw feels like a win

I came across this interesting Bloomberg article written by Ye Xie, a New York reporter, who took the view that a few different markets are taking avoiding the worst case scenarios as wins. For example, the US mid-term election and Nafta. The article also stated that Brexit had had the 'worst-case' scenario avoided. However, it is way too early to tell whether that will be the case with such a key vote for the UK's parliament coming on December 11. I will be in Dubai at the time teaching a group of aspiring traders, so I am expecting a lively session for my live demonstration. Should be fun.

The news over the weekend was obviously the focus with the G20 meeting between Trump and Xi. The 'truce' has brought a wave of relief into equity markets across the world and the S&P 500 is trying to re-assert it's ascendancy. (Nikkei, FTSE, and DAX, all over 1% increases with S&P 500 >1% at time of writing).Whether or not this S&P 500 rally has more legs to it will depend on whether the US data can be strong enough this week (ISM non-manufacturing on Wednesday and payrolls on Friday). The Fed has shrunk back a little from their projected path and presented, on balance, a more dovish outlook with rates seen as 'only just below neutral'. This is the one rate hike for December being factored in. Everything else is going to be 'data dependent' for now.

The Bloomberg article was helpful in clarifying that the macro setting has become more risk friendly. Yesterday saw a good rally on risk, so it is worth reflection on the bigger picture to see whether this is the start of a wider risk rally or just a one hit wonder on the back of the US-China trade truce. The points made for a more risk friendly environment are :

  • S&P 500's rebound last month following a difficult October fits the historical patter and sets a positive backstop for sentiment
  • CHina and US have give themselves three more months to avoid a tariff cliff
  • Powell has retreated from an unnecessarily hawkish tone
  • Oil has found support at $50
  • Italy and Brexit are muddling through (I disagree that Breixt is muddling though)
  • The ViX Curve has become positively sloped again, while bind yields are capped.