Discounting equity market optimism

 In Newsletter

Issue No. 105

Assets covered: S&P 500 Index, CSI 300 Index, ICE Brent Crude Oil Futures, ICE USD Index Futures
Countries covered: US, China

 

Central bank easing and optimism about a trade deal with China pushed US stocks to a record high on Monday. The US Fed will almost certainly cut interest rates for a third time this week and the signals from Washington indicate that trade talks with China are progressing towards an initial agreement that could be finalized in November.

 

However, the optimism may be getting a bit ahead of reality. Our models, derived from the underlying drivers and interplay between trade, economic, exchange rates and other data, indicate the current market rally has diverged from the fundamentals. In fact, based on where the economy is, our forecasts point to declines in US equity markets through the end of the year.

United States S&P 500 Stock Market Index (SPX) price forecast through December 2019

United States S&P 500 Stock Market Index (SPX) price forecast through December 2019

This chart was generated using CI Futures. Book a demo to see it in action.

 

Short-term market movements are of course often driven by sentiment and expectations, but there may be reason for some caution. Any kind of trade deal with China would be a positive for markets, but the two sides have been seemingly close to an agreement before, only for things to unravel. Nothing in the current discussions has been finalized yet.

 

For context, the Chinese stock market has also held up over the last few months, with our data calling for stocks to at least hold steady into the new year. China’s economic growth has slowed this year, but not dramatically, which means Beijing may not feel pressure to compromise a great deal in trade negotiations.

Shanghai Shenzen CSI 300 Index (SHSZ300) price forecast through December 2019

Shanghai Shenzen CSI 300 Index (SHSZ300) price forecast through December 2019

This chart was generated using CI Futures. Book a demo to see it in action.

 

While the Fed is expected to cut rates again, this could be the last cut in a “mid-cycle” adjustment, meaning no more cuts in the foreseeable future. Meanwhile, economic data has been weakening for months, with manufacturing contracting and job creation slowing. Our outlook for Brent crude oil prices is not bullish for the economy, either. Oil prices often rise on expectations for increased economic activity, and right now we see oil prices softening through December before some recovery early in 2020.

ICE Brent Crude Oil Futures (B10) price forecast through December 2019

ICE Brent Crude Oil Futures (B10) price forecast through December 2019

This chart was generated using CI Futures. Book a demo to see it in action.

 

Another potential drag on growth is the strong US dollar. We see the dollar, reflected below in the forecast for ICE USD Index Futures, strengthening again in November and December after October’s pullback.

CHRIS/ICE USD Index Futures (DX1) price forecast through December 2019

CHRIS/ICE USD Index Futures (DX1) price forecast through December 2019

This chart was generated using CI Futures. Book a demo to see it in action.