BNY Mellon: Reasons (not) to be Cheerful: Part 3

5 nov 2018

By Neil Mellor, Senior Currency Strategist, BNY Mellon

Reports of a budding US-Sino trade deal sparked life in the markets last week, and although subsequently denied, the episode gave us good insight into what a deal would mean.

Sad to say, however, that while bears would presumably take to the sidelines were a deal secured, they would hardly have good cause to head to the changing rooms.

There is little doubt that the US-Sino trade dispute has cast a long shadow over the global economy - certainly, the largest gains and losses for the Shanghai Composite this year have tended to coincide with developments on that front (Oct 22, Jun 19 and Mar 23 to name but three examples).

Twenty five days would in any case have provided ample time for a potential deal to go awry, but market ebullience following Friday’s reports was understandable: the Shanghai Composite’s 20% fall this year offers ample scope for a marked rebound, and presumably, one with a substantial spill over into regional and global markets in general.

Were the USD to retain a strong footing, however, then any rebound in risk would be immediately tested, and over time, it would be easy to envisage central banks implementing policies unconducive to their economy’s needs, and in the capital flow-sensitive emerging sector in particular.

Certainly, a stronger USD is by no means assured and we must remain mindful of conclusions to rallies past