Equity markets in the US took a distinct turn for the worse ahead of the long sunny weekend in the UK. On Friday, the escalation of the US-China trade war and the continued depreciation of the Chinese renminbi against the US dollar once again spooked risk assets. The S&P 500 fell 2.5%, to 2850, a level the index has recovered from three times this month now. There was a partial recovery on Monday as Trump attempted to encourage capital markets to believe an agreement will be reached while attending the G7 meetings over the weekend.
Almost counter intuitively equities have been falling and bond prices rising this month despite an improvement for US economic data. The Citi surprise index, which reflects the hard-economic data against expectations, has been steadily climbing through August. The much-anticipated Jackson Hole symposium at the end of last week rather took backstage in the end to the trade fears. Jerome Powell played the straight bat as expected. However, several of his colleagues, when asked for their views, appeared less than convinced the Fed should be in any rush to cut interest rates at this time.
To add to the already increasing wall of worry, the ongoing demonstrations in Hong Kong are now having a material impact on that economy. Leading to concerns, this will impact growth in the larger neighbour China. Investment in Hong Kong is down 15% year on year; growth is close to zero. Hong Kong’s economic importance to China may have diminished over the years. Hong Kong is now mainly used by China to channel its investments around the world as a large share of the capital that flows into China goes through the Hong Kong financial system.
We have highlighted risk sentiment has continued to fall this month according to several indicators. However, one indicator often used as a barometer for fear and greed, has been less fearful than could been anticipated. Despite the US equity market falling for four straight weeks, the index remains below its long-term average. Possibly indicating complacency among investors, or it could offer hope that investors expect a more positive conclusion to the China-US trade dispute. Other signs that September may hold for a better month the Japanese yen has improved against the US dollar in the past few days.
The other trade dispute threatening this side of the Atlantic has seen sterling fall. Hopes from the G7 meeting there may be some coming of minds has seen a small rise in the currency over the past few days. Rather as equity markets have ebbed and flowed with China-US trade, the currency may well do the same up until the October deadline.