Where to Ride out the Volatility

We look at the causes of the latest round of fear and volatility and where to ride out the storm. Stock markets were hammered again Thursday but it was the New Zealand dollar that led the way in a sign of shifting correlations. China trade balance is due up next.

There was no single trigger for the rout in markets but a handful of factors came together, leading to a tipping point.

1) Rates

Fed hikes are coming whether Trump likes it or not. The Fed will take pains to appear to be independent and that could harden their resolve to hike. In any case, the market is signalling a new regime of higher rates and potentially higher inflation. What would become of the 3.8% GDP growth when we take out 2.0% inflation, followed by the expiry of Trump's tax stimulus? 3.20% yields become an obstacle, especially when the IMF downgraded growth for the US and Europe.

2) The trade war

There was one good sign Thursday as the WSJ reported that Trump will meet with Xi at the G20 but the news has been overwhelmingly negative. It's no coincidence that equity selling started after Pence's anti-China speech. The lines are being drawn for a long battle.

3) Earnings

Big financials kick off earnings season Friday. Citigroup in particular might have insight into how consumers are coping with higher rates. More broadly, the focus will be on guidance and commentary because the near term numbers will be strong. Companies warning about global growth may turn this from an equity event into a rout in FX.

4) China

Perhaps the most - concerning chart right now is the Shanghai Composite. Yesterday's 5.2% decline broke major support in a drop to the lowest since 2016.

Where to ride it out

Gold showed genuine signs of life Thursday in a $30 to close above the September highs. With bonds, equities and almost everything else falling, there's an increasing demand for safety, even if it pays nothing. More demand makes sense with looming trouble coming from the US midterms, the continued China battle and rising interest rates.

Looking to China, the trade balance report is due later but there were also rumours that the Treasury would name China a currency manipulator on Monday when the semi-annual FX report is expected to be released (there is no firm release date). A Politico report said it will be the status quo but that news did little to calm markets. Ashraf reminded us of the unusual event of the dollar failing to rise during the equities' selloff. That could be part and parcel of pre-empting a reflexive rise in the Chinese yuan. And we know how that correlates with gold.

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