Abu Dhabi, UAEFriday 18 October 2019

Adopt a wait-and-see stance before buying into the market mayhem

With equities plunging and gold rising, Gaurav Kashyap urges investors to tread cautiously

While Moody's, S&P and Fitch and other ratings firms may not be perfect they are probably as good as it gets.  AFP
While Moody's, S&P and Fitch and other ratings firms may not be perfect they are probably as good as it gets.  AFP

July was all about sterling weakness. The cable – the exchange rate between the US dollar and the British pound – dropped 4.2 per cent as Brexit uncertainty overshadowed markets.

After Boris Johnson moved into 10 Downing Street, the likelihood of a hard Brexit becomes a more realistic scenario than three months ago. Traders are clearly echoing bearish undertones for sterling; the Commitment of Traders report for the week ending August 2 showed short positions in the pound have grown to 90,200, the highest levels in more than two and a half years.

Gold has benefitted greatly from the risk-off environment emanating from Donald Trump's ongoing trade war.

Gaurav Kashyap

The UK finds itself in a rather precarious position now with just over 12 weeks to go until the October 31 deadline for leaving the European Union but with Parliament taking a recess from September 14 to October 9, this leaves approximately nine weeks for a deal to take place. I fully expect pound weakness to continue through August with little respite for sterling long positions. Technically, I expect to see a move towards 1.1990 levels for GBP/USD. While there are some high-profile events on the UK economic calendar, including inflation and gross domestic product data coming up, I feel this may only provide intraday relief. Overall the bearish sentiment will continue throughout the month ahead.

Gold was the other talking point during July and the first days of August. The precious metal popped to more than six-year highs in trading this week. Gold has benefited greatly from the risk-off environment emanating from Donald Trump's ongoing trade war with China. We saw Mr Trump unexpectedly introduce another round of tariffs on an additional $300 billion (Dh1.1bn) worth of Chinese goods and this launched gold more than $30 on the day.

The trade war took another turn on Monday, the start of this trading week, when China let the Chinese yuan depreciate past 7 against the US dollar. The West’s grievances towards China’s exchange rate policy is no secret and letting the yuan depreciate past a level its historically protected to keep its western parties content is a big sign this trade dispute is going to escalate and will be a key theme in driving volatility in the markets. I expect gold to remain well bought this month with a test of 1490 levels.

Equity markets have been getting spanked in the trade war dispute; since Mr Trump’s announcement last week, the Dow Jones has tanked more than 1,000 points. This was after the index rallied past 27,000 to set an all-time record in July. While the ensuing sell-off could be a result of some profit taking, the risk-off sentiment as a result of Mr Trump’s actions would have seen a flight to safety, hurting US equities.

Equity markets are a tricky play here – economic indicators from the US continue to be supportive of US equities on a short-term basis. We saw the Federal Reserve last week bow and announce a 0.25 per cent rate cut, which would have rallied US equities, but they also announced the end of their bond-buying programme a few months earlier. Wait to see the bottom of this current equities move; I see next good buying support coming in at 25606 for the Dow Jones index.

While the Federal Open Market Committee did deliver a largely expected rate cut in July, it maintained a more neutral tone rather than the markets expected. The less than dovish stance will keep markets guessing until the next rate decision is due up on September 17/18. In the meantime, continue to keep an eye on the US economic calendar for clues. Stronger than expected US figures will support the US dollar and US equities, while weakening prints could see sell-offs in US asset classes. US inflation data, due out on August 13 will be a key insight into future Fed policy plans. Remember, that along with employment and GDP, inflation remains a key mandate for future Fed policy. Overall, with so many high-risk themes at play, a wait-and-see approach would prove wise before building positions in the markets.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti

Updated: August 8, 2019 02:10 AM

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