<p>This week, there are G20 and US Fed meeting which may influence market movements. We also discuss the risk of a trade war and a possible return of US dollar strength.</p><p><strong> 1. G20 and US Fed meeting</strong></p><p>The G20 meeting is held at Bueno Aries on 19-20 March. Finance ministers will meet to discuss issues regarding cryptocurrencies, fintech and cybersecurity. A common regulation on cryptocurrencies may be proposed in the meeting. This is to address rising concerns of cryptocurrencies’ impact on financial stability and financinal fraud. Bitcoin recently suffered a price correction with the ban by Google on cryptocurrency advertisement. Therefore, further restrictive regulation may lead to greater price fallout for Bitcoin.</p><p>Another important event is the US Fed meeting held on 20 -21 March. The US Fed Funds target rate will likely be hiked to 1.5 – 1.75% range. This is Jerome Powell’s first Fed meeting as Fed Chairman. Powell has indicated a hawkish tilt in his testimony to the US Senate. From this Fed meeting, we will have further clues on Powell’s hawkish stance and his influence over the rest of FOMC participants. US treasury yields may push higher if there are furthe evidence of 4 rate hikes this year.</p><p><strong>2. Trade war risk remains</strong></p><p>Trade protectionism is on the rise after US President Trump announced a 25% tariff on steel imports and 10% on aluminum. Some commentators interpret the tariffs as one-off, to provide support to Republican candidates in the coming special election in the state of Pennsylvania. However, we believe the concerns surrounding the trade war is not over. Recent changes to the political leadership in US could foreshadow a potential trade war between US and China. Mike Pompeo and Larry Kudlow were appointed as Secretary of State and National Economic Council Director respectively. Both are widely recognised as trade hawks.</p><p>The next escalation point could be measures announced after US investigation into China’s technology transfer practices. A large fine on China may lead to a full-blown trade war. OECD estimates that global GDP would dropped by 1-1.5% with a permanent 10% rise in trade costs. A trade war is equivalent to wars on market and will be unhealthy for the economy and capital markets.</p><p><strong>3. Return of US dollar strength</strong></p><p>The US dollar may get a bid in the coming weeks. Supportive factors include bullish comments by Kudlow to “buy King Dollar”, and strong demand for US dollar funding with the widening of both LIBOR and LIBOR-OIS spread. Further, a hawkish FOMC statement could be the final straw that break the weak dollar.</p><p>Markets are undergoing a <strong>consolidation</strong> phase as it moves from<strong> Goldilocks</strong> to a <strong>Reflation</strong> regime. There is a confluence of potential risk factors that is holding the markets back. Any wild swings in currencies including a strong US dollar could take us to the lower end of this consoldiation phase.</p><p>Our base case is for Equities market is to stay <strong>within the range</strong> and a<strong> slow rise in interest rate</strong> within the Bonds market:</p><p>• S&amp;P 500 Index - 2560 to 2790; Stoxx 50 Index - 3300 to 3500; Hang Seng Index - 29500 to 32000</p><p>• US 10-Year Yields - 2.8% to 3.0%; German 10-Year Yields - 0.5% to 0.8%</p><p>The key risk will be<strong> contagion</strong> effect from a full-blown trade war or strengthening US dollar. Indications of a contagion scenario are as follows:</p><p>• S&amp;P 500 Index <strong>cracks below</strong> 2550 or</p><p>• US 10-Year yield<strong> rises above</strong> 3.1% or</p><p>• US dollar <strong>breaks above</strong> 92.15</p><p><strong> Edmund Chan, CFA</strong></p>