Consider the two dominant macro influences, the first being trade tensions, and the second, the anticipated easing cycle from many developed and emerging market central banks. The two are obviously connected, but after Friday’s weak US payrolls report and concerning global manufacturing PMIs, they can be considered independent.
We live in a world where market participants focus on a macro thematic, and trade towards an outcome, as they see fit. We crave answers to justify the pricing structure and the validation that we’re on the right path – that time is now, and we eye the June FOMC meeting and G20 leaders’ summit. In the video, I put the two events on the radar, as they are going to get increased focus. Specifically, with 78 basis points (three rate cuts) priced in over the coming 12 months, the FOMC statement, as well as Fed chair Powell’s press conference simply has to open the door to cuts. It has to be sufficiently dovish to validate this rates position, or we will see the USD rally, and equities under heavy pressure, with implied volatility spiking.
Prior G20 meetings have been forums for some significant initiatives, so there will be increasing expectations for convergence between Xi and Trump. That said, there is no guarantee the two leaders will even meet, with Trump detailing overnight that he will place tariffs on the $300b of Chinese exports (to the US) if that is the case. One suspects they will meet, however, and the market will, therefore, be sensitive to any narrative that the two are coming together to get a deal done.
While it easy to focus on the potential reaction should the Fed not meet the market pricing, a world where the Fed signal an intent to ease married with a better feel to US-Sino relations, is a world where traders take additional risk.
Chris Weston, Head of Research at Pepperstone