What will September bring to equities?

Global equities are down 2.5% in August as volatility picked up and US-China trade war worsened with the prospects of more tariffs both ways. In addition, macro fundamentals continued to worsen, and the US yield curve inverted on the 2-10Y spread highlighting that a recession is brewing if the bond market is right. Yesterday’s rally in equities is not something we buy into as the flurry of events dictate a more defensive approach. We expect equities to come under pressure in September as central banks will deliver more easing, but it will eventually be viewed as weakness compared to initial positive reaction.

Our main point is simply that it’s the US-China trade war which is the catalyst in the macro fundamentals and that it cannot be modelled. Dynamics change from recession to recession. This means that when the Fed’s models are picking up enough weakness to warrant rate cuts it could already be too late. That’s why rate cuts typically precede recessions because the Fed is behind the curve in the last stage of the cycle.

DAX opens above resistance level

Investors are buying into the trade war optimism theme although if one looks through the Chinese press little optimism around US trade war is evident. But DAX futures (FDXc1) are a high beta to the global economy and trade war. The 11,850 level in the DAX index is a major resistance level and DAX futures pushed through it yesterday but ended the session below it. However, this morning it opened above it in a signal of strength. If DAX futures cannot push above this level before the weekend it’s a strong sign that investors are nervous and don’t want to put too much risk on the books heading into the weekend.