NOWOTNY: TRADE WAR CAN LEAD TO CURRENCY WAR
There is nothing really new with the above statement. As we approach the “deadline” for the Trade War situation one needs to remember that markets discount events like these. The question is how do you price and trade such “events”?
We can read Chinese and Hong Kong stocks are down on a daily basis. That is correct but don’t forget HSI Index is down 12% already from June highs.
The trend is horrible for sure, but given the big support level we are reaching here and the long term trend right around these levels, the set up for a bounce is starting to look interesting. This is not a strategic call to become bullish this space, but given the fact HSI Index and other related indices have come down sharply already, a sharp bounce would not surprise us.
Below chart showing HSI Index sitting on long term trend.
Volatility has moved sharply higher over past weeks. Implied volatility (blue) has spiked above the 30 day historical (white) and is trading relatively rich to the actual moves.
The entire one year outperformance by the HSI Index compared to S&P 500 has closed rapidly since early June. The spread is now S&P 500 green, ie S&P 500 trades above HSI Index seen on a one year chart. That is very far out on the normal distribution curve.
Source: charts by Bloomberg
