All eyes now on Renminbi

Equity investors are once again having their conviction tested by the volatility created from the uncertainty of a trade war between China and America. Equity markets across the globe fell between two and three pct on Monday. The Vix index rose sharply as investors looked to protect their portfolios. The CNN fear and greed sentiment indicator fell sharply into fear.

Equity investors ran for the hills as China let the Renminbi fall below 7 to the US dollar. A level that it had defended in the past. This currency devaluation was viewed as a direct retaliation to Trumps 10% tax on 300 billion dollars of goods. America is calling China a currency manipulator, adding fuel to the fire. Equity markets stabilised on Tuesday as China pledged currency stability.

Bonds and gold were in demand, as was the Bitcoin which has now become another storage of safety. The yield on ten-year German bunds fell further into negative territory.

We expressed the view at the start of the month that China trade talks were liable to dominate the month. Now the Fed meeting had concluded, and the company reporting season was coming to an end. That became the case.

We remain faced with the same dilemma we have been for many a year since the financial crisis. We have had our nerve tested with Greece and the euro. The Brexit vote, flash crashes in the bond market, and debt ceiling fears, as central banks look to continue to provide a stimulus for global growth in the face of these uncertainties.

Equity prices and company earnings have been supported mainly by a combination of cheap money, low inflation, and modest economic growth. So-called Goldilocks. More recently, equity markets have marked time as earnings have stalled.

Equity investors have been reluctant participants as they continue to fear a repeat of 2008. Bonds remain much in demand despite the lack of attractive rates of interest. That asset has become as risky as any other. Equity investors will now be looking to the Renminbi for direction. With the G7 meeting at the end of the month. Hopes will be for a resolution to the trade discussions during or leading up to that meeting.

The rhetoric from both Europe and the UK seems to be concluding that a no-deal is on the cards. Despite this being not in the best interests of either side.

Posted on August 6, 2019 .