Shanghai Composite Index has
been in a bear market since 13 April as it has priced in the full-scale impact
of the US-China trade war. The weakening of RMB against USD since mid-April has
resulted in the continued decline. Within a short span of three months, the RMB has weakened more than 6% against USD.
Shanghai Composite Index in a Bear Market since 13 April 2018
Weakening of RMB against USD since mid-April 2018
On the other hand, the US market has been consolidating well in a bull market, with S&P 500 VIX at a very safe level of around 13.
However, I think Federal
Reserve should be more concerned about the rapid rise in US CPI than the
US-China trade tensions as it is easier for President Trump to tame the trade
war than to tame the CPI.
As it is, US CPI rose
0.1% in June
2018, and in the 12 months through June, the CPI increased 2.9%, the biggest gain
since February 2012. The underlying trend continued to point to a steady build-up
of inflation pressures that could compel the Federal Reserve on a path of rapid
interest rate increases. Furthermore, the retaliation from China to increase
tariffs against the US goods can only add fuel to the fire.
Given that Trump will
not want the US stock market to be in a bear market, before the US stock market
plunges to a level that he cannot really contain, it is prudent that we can
assume the US market’s near-term correction, if ever there is one, will be the
most 10% and that is the point for our entry, not retreat.
