Market risk sentiment continues to deteriorate with global stock markets and some commodity prices extending their recent drops. The risk-correlated G10 currencies are struggling while safe havens like gold and JPY continue to shine. Among the likely culprits for the recent deterioration in market sentiment seem to be the recent comments by US Treasury Secretary Lew that markets should not expect 'crisis measures in a non-crisis situation' ahead of the G20 meeting.
In addition, recent Fed comments suggested that the FOMC remains on course to tighten further despite weak global sentiment and in view of the accelerating core inflation measures.
Last but not least, concerns about lingering oil price weakness and more CNY FX volatility seemingly weighed on sentiment. Starting with the latter two factors, we note that often markets respond to changes in oil prices or the CNY fix by using well established correlations to translate the corrections into risk-off or risk on moves elsewhere. There is little regard for the actual drivers of these changes. In particular, we think that the latest dip in oil prices seems driven by oversupply rather than demand concerns.
In addition, it seems that the recent CNY-depreciation vs USD reflects attempts to keep the CNY TWI stable rather than engineer another leg lower in the currency. In addition, we think that the push for greater policy coordination is still very much in place ahead of the G20 summit. Indeed, a recent IMF report released ahead of the meeting reiterated and strengthened its call for greater policy coordination of the diverging monetary policies around the world as well as concerted fiscal stimulus to offset the drop in private investment. In addition, comments by various Chinese officials of late signalled readiness for more fiscal stimulus as well as greater transparency when it comes to the outlook for CNY.
With than in mind and given the market price action of late, we suspect that the bar for market positive outcome from the G20 meeting could be low.
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