Still Not Time To Be A Contrarian

U.S. equities are trying to catch a bid, but we are not yet convinced that it will stick.



Earlier this week, we noted that looming Fed rate hikes, intensifying global deflationary pressures and therefore profit disappointments, as well as perceptions about Chinese stability were culminating to wreak havoc on risk asset prices. These forces have not abated enough for us to become more optimistic on the cyclical view for equity prices.
  • As highlighted in the next insights, expectations for a September rate hike have collapsed. A ‘delayed’ rate hike will be justified by policymakers by the worsening in financial conditions and “international events”. But that does not materially change the thinking at the FOMC, namely that policymakers are keen to move off the lower bound at the first opportunity, so long as domestic growth holds. With market expectations of rate hikes now already very low for September, it will be hard for the Fed to engineer a “positive surprise” for markets.
  • The fundamental problem facing the world economy is deficient final domestic demand. Price adjustments in commodity markets, especially oil, should eventually boost final demand, but the response this cycle has so far been muted and slow. A cloud is still hanging over the profit cycle.
  • It has become clear that investors are assigning a much higher risk premium to EM/China risk assets: yesterday’s cut in the Chinese reserve requirement ratio failed to even temporarily halt the slide in Chinese equity prices. The timeline for when/how/if Chinese policymakers deliver sufficient stimulus is unknown. In addition, there is no way to assess the magnitude of capital flows out of and into China. These uncertainties imply that further market turmoil lies ahead.

Same Macro Headwinds

New York Fed Governor Dudley’s comments yesterday underscored what we already know: that the Fed is unlikely to lift interest rates while markets panic. But ultimately, the same global macro headwinds, and poor final demand conditions p … [More.]

Chinese Stocks: The New Unknown

There are two forces driving Chinese stocks:   The PBoC is among the few major central banks that can engage in further monetary easing, and China's ongoing fiscal stimulus programs will likely shift into high gear in the coming … [More.]

Global Deflation Trends To Intensify?

Understanding Chinese policymakers' motives is tricky and can be contentious. Leaving aside whether the motivations behind the move to make the exchange rate responsive to market movements were economic or political, what is clear is that the risks … [More.]

What Will Dominate The Bond Market?

Fears of a policy misstep help to explain the flattening of the U.S. Treasury curve. The two-year yield is moving higher as we approach the Fed liftoff date, but the 10-year yield is not reacting as it normally does at this stage of the cycle. … [More.]