This week provided the collapse of Fed interest rate expectations and thereof US bond yields. Among others, Fed Bullard and Powell delivered a clear indication of their dovish bias. Risk sentiment is weak as global fears of a trade war rose, geopolitical tension increased and economic data further decelerated. In the FX space, safe-haven currencies were dominating. Yet, USD suffered further selling pressure due to overbought conditions and short-term issues. Within this macro backdrop, EM FX continued to struggle. We are an outside consensus that weak growth, falling yields, political uncertainty, and loser Fed policy will likely weaken the USD. We would rather take the position that USD historic role of safe-haven and expectations that lower Fed rates will attract risk-seeking capital into stocks.
Using the rationale that lower rates will pushing equities higher. Currently, trade fears remain the greatest cause of downside risk for equities. Despite overvaluations, central banks ability to manipulate asset prices with monetary policy stimulus should repeat itself. With the ECB likely to push, rates further negative and union fragmented over idiosyncratic national risks, will undermine faith in Euro. Perhaps the greatest threat to our expectation is the growing international distrust of the USA. It started with political leaders (Trump calling people “stone cold loser” is hardly trust building), but could easily spread to investors seeming blind trust in the USA. Especially, if the perception of Trump / Federal Reserve intrusion is not halted and deficits are not respected (or at least the illusion of consideration).
Today, the market will be focused on the May payroll report. US jobs anticipated to expand by 175k with wage gains rising 0.3% m/m. Yet these numbers were during a period of de-escalation in trade tensions. The weak report from ADP has thrown NFP expectations into chaos. The risk of a downside read has increased meaningfully.
