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Waiting for Central Bank Medicine to Calm Markets

07/11/2018 2:00 pm EST

Focus: FOREX

Robert Savage

Partner & CEO, CCTrack Solutions

Waiting for central bank medicine to work again seems to be the best hope to calm markets, else we maybe at a tipping point with S&P 500 (SPX) 2700 in play writes Bob Savage Wednesday.


Back to tit-for-tat trade war fears. China will take “necessary countermeasures” as before against the U.S. for its acceleration and escalation of tariff sanctions, the Ministry of Commerce said.

The U.S. plan to add an additional 10% tariffs on $200 billion worth of Chinese products was “completely unacceptable” and China felt “shocked.”

Markets are rounding up the usual suspects. That means buying Japanese yen (USD/JPY), selling oil, buying USD vs. EM, selling equities, buying bonds.

We appear to be caught in the Casablanca repeat loop. The NATO summit is underway and Trump started with a lecture on defense spending. All of the geopolitical news highlights the fact that animal spirits matter and that the plunge today in markets will bleed into future corporate and consumer plans.

This means financial conditions still matter to central bankers and the BOC today will be a litmus test of this. It also means that escalation of the trade war theme makes investors weary of playing the same game three times.

Buying the dip may be less fun and less rewarding. The counterbalance of bonds is in play today and a rally would hurt positioning for a quiet summer with modest risk-on hopes.

This may be the key to watching for a larger unwind today as we wait for more headlines and tweets. A drop back to 2.68% 10Y and a falling back of the USD on rate spreads maybe what the risk-doctors want to prescribe to hold financial conditions intact.

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