You’re at the mercy of the Trump/ Xi Jinping pow wow now.
While tumbling US auto sales dominated the tape on Monday and Tuesday in terms of giving the market a fundamental reason to be skittish, all eyes are now squarely on the Trump’s first meeting with the Chinese President.
Whether or not that meeting will yield anything other than a press conference and some conciliatory language on trade is doubtful, but everything – 10Y yields, USDJPY, and ultimately equities will be watching.
As former FX trader Mark Cudmore wrote overnight, the Trump/Xi meeting is likely to overshadow the Fed minutes, which is ironic considering yesterday’s news about Lacker.
In any event, find Cudmore’s latest below in which he asks which camp you’re in: the camp that thinks the still present central bank liquidity flow backstop is still just as good a reason to keep buying as any, or the camp that thinks disaster is just around the corner.
With fundamental trading semi-paralyzed ahead of Thursday’s Trump-Xi meeting, it’s only prices that matter for the moment.
- The summit between the Chinese and U.S. leaders could have profound implications, but it’s nearly impossible to have any bias going in to the meeting. There’s genuine potential for both positive and negative surprises
- As a result, markets are in a holding pattern as we wait to see whether risk-aversion is really ready to step it up a notch. Key levels across assets have not yet broken, with the 2.3% line in 10-year Treasury yields being the most critical
- The context is a global economy that’s strengthening. Excess liquidity remains in the system meaning that yield and returns will continue to be chased overall. The flip side is that there are flickers of risk-aversion in markets that are not used to volatility
- That environment leads to an adamantly divided market. On one side are those who cite growth and liquidity as a reason to always buy the dip. On the other, those who fear calamity, citing the idea that low volatility has induced excess leverage to chase returns and a misallocation of capital
- I have sympathy with both views and while trading each individual asset requires conviction, sensible risk management of a portfolio requires a more balanced perspective. I believe markets are vulnerable to a larger correction this month, but the structural macro story leads me to be bullish longer-term, so I don’t expect a sustained bear market
- Thursday’s high-profile meeting may not provide any concrete outcomes, but it’s likely to at least provide sufficient excuses for markets to act, even if it is on a pre-ordained path
- Economic releases due Wednesday, including the FOMC minutes, will be overshadowed by the China-U.S. summit, so read some long-term macro research instead. Prices will give the signal when they are ready