Unhappy Monday
|Lots of red in equity markets at the start of the week. Following America’s weak payroll and wage data for November (following weak German GDP and export data), markets have ramped concern over slowing global growth. OPEC’s and Russia’s oil production cuts had limited effect: worry is about demand. Despite fears of inverse yields, US treasury prices dropped. History indicates that two of the last three recession coincided with Fed hiking and inverse yields. A rally in oil prices would give inflation bulls hope that flattening/inverting yields could reverse. Yet real fears that USA’s continued tensions with China – especially following arrest of a top Huawei executive – could trigger Chinese reprisals. Graphic images of French riots reinforce pessimism. Finally, massive event risk is embedded in the Brexit drama, as the UK parliament’s vote is set for tomorrow. Consensus is the Chequers’ plan will be rejected, sending negotiations into absolute chaos.
We are seeing a build-up in long GBP as markets anticipate the least disruptive path toward Brexit. We suggest traders move carefully in GBP ahead of critical vote. Despite the growing weight on equity prices, we suspect a quick fix is possible. A potential US slowdown and volatility in stocks has triggered thinking that hawkish Fed path could be in jeopardy. Further statements regarding policy limits or a dovish Fed December meeting would do wonders for investor sentiment.
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