(18 AUGUST 2020)DAILY MARKET BRIEF 1:USD at two-year low on weak data.

The US dollar sank to a two-year low after the Empire Manufacturing index warned that the business conditions in the US deteriorated significantly more than expected in August, with the headline figure showing a decline to 3.7 from 17.2 printed a month earlier. New orders slipped back to the contraction zone, unfilled orders and average workweek indices printed a further decline below zero and the medium-term expectations worsened, signaling that the economic recovery in the US is losing momentum, and the slow progress in fiscal talks appears to be weighing on the small, medium-size business outlook.

There are two ways the market reacts to weak data. Either investors scale back their risk holdings on the back of deteriorating business conditions and the expectation of further contraction in company revenues, or they ramp up their risk allocation in hope that the bad figures would give a boost to the stimulus talks. Looking at the US equity indices’ performance yesterday, we could tell that investors continue betting on more fiscal stimulus even though they will have to wait until the US policymakers are back to office in early September.

The S&P500 (+0.27%) tested the February closing record for the third time in a week but failed to break it, and Nasdaq (+1.00%) extended gains as investors dumped their bank stock holdings and moved more capital towards the most popular big tech.

Meanwhile, the US announced more restrictions on Chinese tech giant Huawei, adding another 38 of its affiliates in 21 countries to its blacklist to limit adoption of Huawei’s 5G technology. President Trump said the US doesn’t want to do business with these companies due to national security issues. We are now in a dynamic where each step taken by the US hammers the hope of seeing the US-China relationship improve, deteriorate the basis for healthy trade talks and tears the two countries away from each other.