Risk seekers drift back to global shares

Optimistic comments from the White House tempt buyers back to global shares

Risk seekers keep drifting back

Summary

Optimistic comments by the White House's economic adviser, ahead of trade talks between China and the U.S., are tempting buyers back to global shares.

Saturday night in Buenos Aires

Investors continue to drift back to higher-risk exposure after optimistic comments by White House economic advisor Larry Kudlow. Yet, by the start of U.S. business in the middle of the week, despite “a good possibility that a deal can be made”, there’s still no agenda for Trump-Xi discussions over dinner on Saturday night. And just below the top level, there are no plans for conversations between top advisors, according to Kudlow. Circumstantially then, best efforts for these arrangements still have a ‘basic’ air. That points to limited, if not low, expectations between Washington and Beijing. Unless a clearer scope and framework arrive by the end of the week, there’s a good chance stock markets will price out even more of the rationale for clawing-back ground since late October, regardless of last-minute assessments of what could be achieved at G20.

Asia, China have most at stake

A normalised chart of dominant stock market regions suggests Asia-Pacific indices have more at stake. MSCI’s emerging APAC and the more closely followed ex-Japan gauges are up 5% to 6% since indices generally bottomed on 29th October. They’re in close orbit of the most principal hub of all, China, where Shanghai and Shenzhen’s CSI300 is up 3% since the end of October. Europe’s broad STOXX aggregate has barely moved half a percentage point higher in the shadow of Brexit, Italy and rekindled growth worries. The S&P 500 has added 1.5%. Gains by 2018’s laggards in the east based on G20 hopes are coherent, given their position at the leading edge of a dip in the global cycle. With the most to lose for now should China and the U.S. continue a headlong plunge into cold trade war, Asia-Pacific shares could also fall the fastest and hardest on Monday if Tump and Xi agree little at the weekend.

Figure 1 - Normalised stock index chart: 29th October 2018 to 28th November 2018 – daily intervals

Source: Refinitiv/City Index

Powell the cheerleader

Till then, investors will continue to track White House and Xinhuamen ‘tape bombs’ (pro- and anti-risk), though loosely, we think. We expect a clearer discount from Fed chair Jerome Powell’s speech (17.00 GMT) and possibly FOMC minutes. Admittedly, some of the charge has been removed from Powell anticipation. This is after vice chair Richard Clarida on Tuesday walked-back some of the rudimentary policy walk-back he (and Dallas Fed president Rob Kaplan) conducted earlier in the month. Their seemingly co-ordinated comments did allow the Fed to informally acknowledge global economic and market moderations. This avoids possible over or under-pricing of such comment in the context of December’s policy statement. If our interpretation is correct, Fed forward guidance will now resume its obdurate optimism on the U.S. economy, until that stance is unsustainable. Appropriately, Powell has been the preeminent cheerleader of that perspective. Whether he will continue to shake those pom poms as much is thereby the main signal to watch for when he speaks later. Chances that the Fed minutes would bring anything like a revelation were always low and look even lower now. More so, after the second look at Q3 GDP, out a while ago, printed in line with forecasts at 3.5%.

U.S. GDP passes without incident

The one tenth of a percentage point shortfall relative to expectations in quarterly core PCE at 1.5% growth was also shrugged off. The dollar index remains comfortably back above its key trend line since September after an 8-session break. True, the rising trend no longer looks as robust. But any euro and sterling updraft are still put into perspective whilst the dollar is top side of the last quarterly trend of the year. With the BoE’s financial stability report later, sterling looks most prone to downward pressure. It would be a surprise if the Bank’s separate Brexit impact assessment held anything new at this stage. But sterling may not require much inducement to swing, given high-octane volatility conditions. A dearth of key dates before the ‘meaningful vote’ in mid-December also leaves the pound prone to yet more ‘headline risk’, till Monday’s PMI releases.

Technical analysis chart: ICE Dollar Index – daily intervals: 28/11/2018 14:28:50

Source: Refinitiv/City Index

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