Cross currents of “hawkish” Fed, weak jobs data, and yet strong earnings beat. The high-octane rally in global equities began to unravel last week as nonfarm payrolls for May and June were revised down by 258,000 and the US added just 106,000 jobs in the last three months. Adding to the wall of worries were new tariffs levied on foreign trading partners which essentially brings the average US tariff rate to c.15.2% (the highest since 1930s), representing a significant tax hike for US businesses and consumers. Brace for upward pressure on inflation in the coming months as domestic producers partially on-pass the tariff burden to end consumers, at a time when the jobs market is already cratering.
No major surprises in the July FOMC meanwhile, with Fed Chair Powell giving no strong hints of an imminent rate cut in September. But despite the perception of a “hawkish” Fed, sentiments were partly buoyed by robust tech earnings with the likes of Meta and Microsoft beating market expectations. As the Trump administration moves to conclude remaining trade deals, expect some volatility in risk assets for the coming weeks and hedge your portfolio downside risk particularly via exposure to gold – a great portfolio diversifier in periods of uncertainties.
Mind the gap: The uncoupling of policy uncertainties and market volatility. Historically, policy uncertainties and market volatility (as proxied by the VIX index) tends to move tandem. But this is no longer the case since the start of the year as market volatility remained subdued despite the surge in policy uncertainties. The divergence could be attributed to two factors: (1) Trump’s frequent policy U-turns make it difficult for investors to price-in these policy risks effectively and a good case in point is the current fiasco surrounding global tariffs, and (2) Markets are already assuming that Trump uses tariffs as a bargaining tool for broader non-trade related agendas and the threats will eventually not be fully implemented. In any case, the solution to such ambiguity is to maintain sufficient diversification in portfolio construction.
Dollar weakness: Glass half full. US fiscal sustainability and de-dollarisation concerns have resulted in acute pullback in the DXY index this year. The benefits of dollar weakness are, however, two-fold: (1) It translates to a marginal boost for US corporate earnings as international sales account for c.28% of revenue on S&P 500, (2) It underpins further upside in EM assets as dollar weakness eases financial conditions in the region and benefits countries with huge dollar-denominated debt. The current environment provides compelling stock picking opportunities for investors, particularly in select Asian markets.
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