In the last 24h, we’ve learned that the appetite to keep a bid on funding currencies continues to be the most profitable way of expressing the fluid risk-averse environment, as the market comes to grips that the weaponization of the Yuan is a sign of a fresh new chapter in the escalation of US-China trade tensions. It implies that as the flooding of capital back into bonds, gold, bitcoin, and funding currencies (JPY, CHF, EUR) keeps pouring in, the global growth slowdown (risk of recessions) may intensify as supply chains get disrupted and trade activity affected in large scales, just as corporates mull to overhaul decades of an infrastructure intended to capitalize on a globalized world as opposed to an era of deglobalization. Even if one can rest assured that Central Banks will be watching closely from their fences to act as volatility suppressors, the market is walking a tight rope if it buys into the perpetual notion of Central Banks acting as price stabilizers. Should markets start to envision with higher certainty that even the US faces solid chances of suffering a major bump in its economic growth, we may quickly transition into a stage where the Fed must step up to the plate by shifting its message to ‘aggressive dovishness’, hence injecting further vol into the market. It will, therefore, be the combination of recessionary woes, which cements risk aversion dynamics, alongside the caving by the Fed to ease much more aggressively, that may hopefully guarantee the steady pick up in volatility that we are seeing. As August reaches its midpoint, with US-China further apart in trade relationships, the Fed will, before we know it, be caught between a rock and a hard place, having to make up its mind between a much higher USD or an aggressive easing cycle. In either outcome, looks like higher volatility prospects should continue on the rise.
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