U.S. stocks rebounded yesterday after heavy declines on Monday and Tuesday, thanks to a bounce in technology stocks and a slight recovery in oil prices after a steep selloff. Investors in Asia do not seem inspired by this shy rally. Equities are struggling to find direction this morning with mainland China indices turning negative after starting the day in green. The South Korean KOSPI and Hong Kong's Hang Seng index are also slightly lower, while the Australian S&P/ASX 200 rose more than 0.8%.
Investors should not read a lot through yesterday’s Wall Street recovery given that trading volumes were light due to the Thanksgiving holiday. U.S. Treasuries barely moved across the curve, and similarly the U.S. dollar remained stuck in a narrow trading range.
Throughout the decade-long bull market, investors have been following the buy the dip strategy whenever a correction occurs. Higher interest rates over the past two years were having little impact on risk assets as tax reforms more than compensated for the higher required return on equity. However, with the impact of U.S. fiscal stimulus diminishing, higher interest rates become a real threat to risk assets. The global economy has shown clear signals of slowing down, and it’s only about time for the U.S. to follow suit.
Yesterday’s U.S. durable goods data showed orders fell 4.4% in October, marking its biggest decline in 15 months. More importantly, business investment weakened for a third straight month. This may be evidence that a slowing global economy and U.S.-China trade tensions are having businesses refrain from investing in Capex.
That’s what makes next week’s G20 summit a key event for global financial markets. Although Presidents Trump and Xi may not find solutions to existing trade tensions, a sign of a ceasefire may help to calm markets after the recent turmoil. The Federal Reserve might also need to moderate its stance on tightening policy, and next week will show whether the Fed will begin shifting towards a more dovish language.
Unless investors get assurances that growth will return, selling the rallies will continue to be the dominant theme.
Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.
Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 90% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.