Sentiment whipsaws, while markets yearn for substantial information

Another sentiment sugar hit

Another day, another headline; this one, this time, has been good for the bulls. Market sentiment, which has been on a knife-edge in the last 24 hours, performed a 180 late in US trade, upon the release of news: “US WEIGHS DELAYING MEXICO TARIFFS”. The heightened possibility of some degree of amicability between the US and Mexico gave risk-assets a sugar hit, pushing the S&P 500 a little over 0.6% higher for the day. The technical outlook for the benchmark index is beginning to look a touch more favourable now. A new low, it is being argued, is in.

Some conflicting views

From a somewhat more fundamental perspective, such an argument seems a trifle spurious, just for the moment. Really, one’s disposition towards US – and therefore global – stocks at the moment rests on which set of assumptions one chooses to adopt. On the one hand, this sell-off may be the manifestation of a needed pullback in what was an otherwise overbought market – the trade-war escalation has been simply a convenient excuse to sell. On the other hand, this sell-off may be a sign of a marked deterioration in economic fundamentals, and a clear enough indication that the market is behaving rationally to an imminent economic slowdown.

One thing all can agree on

uncertainty: Everyone knows neither position is correct in full-purity. It’s instead the simplest binary to explain market participants’ differing views, along what is a very broad continuum. Most can acknowledge that markets are trading currently within a vacuum of very little reliable and substantive information. And that’s the all-pervasive element to market activity at-the-moment: a high level of uncertainty. The markets have an unsatisfactory amount of information at their disposal to make decisions right now. As such, whatever their bias, traders are presumably willing a quickened arrival of the myriad of risk events coming up in the next few months to form far more substantial views.

Two key events this month

And there is a litany of them coming. Importantly too, these events will probably answer some of the nagging questions driving uncertainty in markets, and causing what is, right now, a choppy trading environment. The first, and most important, will be the Fed meeting in a fortnight’s time, with the market seeking validation for the prevailing view that it will cut interest rates to support the economy and financial markets. From there, interest will flow into the highly anticipated G20 meeting, where US President Trump and Chinese President Xi will talk-trade, with traders hoping to infer how those talks may impact the global economic growth outlook.

The more pressing matters

The major issue with all of that is that both events remain weeks away; and there’s just as likely to be an eruption of further volatility in markets, as there is to find some sort of equanimity, between now-and-then. In the shorter term, attention shifts to US Non-Farm Payroll data tonight, with that event as precarious as it has been for some time. That release’s downside risks seem a little higher than usual: a miss in the unemployment figure or jobs-change number could spark further concerns about slowing US growth; while too strong a print could force an unwinding of the Fed rate-cuts currently supporting risk-appetite.

ECB under-delivers

A so-called “goldilocks” print is what many participants will be wanting there, to ensure the status quo. The overriding issue, whatever the outcome to that data is how right (or wrong) the market is about the Fed – and by extension, current equity valuations, and the overall economic outlook. The matter is of higher relevance this morning, because the ECB met last night, and they didn’t deliver the level of dovishness for which markets were hoping. The outcome of that, though modest, was a pop in the
EUR, and a dip in European equities, as bets of monetary support from the ECB were somewhat unwound.

From the ECB to the Fed

Ultimately, the consequences of the ECB meeting were observably modest. But from a broader perspective, the relevance of the event was less what it says for European monetary policy, and more about what it could say about the Fed. As should be remembered, the rise in stock indices throughout 2019 can be in significant part attributed to the expectation the Fed will be cutting rates this year. Currently, markets are implying the Fed will cut rates at least twice before year end. If this belief proves to be unfounded, expect risk-assets to suffer, as valuations adjust and fears of a global growth slowdown compound.