Financial markets still chopping in ranges defined by December sell-off

Global markets are still chopping in ranges defined by the Christmas sell-off, but risk aversion will return soon enough as the global economic cycle turns lower, according to a leading City analyst. 

In a note to clients, Kit Juckes, Head of FX at Société Générale, said recent news that Japan's exports were tumbling at the end of 2018 is hardly surprising. "It is further confirmation of the weakness in global trade and indeed, the slowdown in global growth. 

“Meanwhile, estimates of US corporate earnings growth seem to be coming down at a cracking pace. The earnings cycle drives the economic cycle, more than the other way around. In a global slowdown, I'd rather be long yen than dollars, rather own under than overvalued currencies, and when markets worry less about the euro's survival, I'll want to buy that too.”

Juckes also said his deliberations with clients in China suggested they are apprehensive about the economic slowdown, nervous about how far it will go and perhaps a “little sceptical” about official efforts to reassure them that a 6%+ growth rate is still very strong.

“These are people who haven't experienced a major economic downturn,” he added. 

The SocGen expert said: “I don't think there's a lot of trading risk in the FX market at the moment, but I do think that with the US curve flatter and higher than other developed markets, and with a lot of money having been repatriated into dollars from emerging markets last year, the market is invested in dollars and under-hedged in FX. 

“In that sense I don't think it matters whether we see CFTC positioning data for a while, because the traders aren't the ones whose next move matters.”