China trade data and global leading indicators still flash slowdown.
This year’s rally in risk assets across the globe has forged on during the final week of February despite signs that global growth is slowing.
The strength that global stocks have displayed thus far this year is, indeed, impressive. Since the December 24 lows, the Dow Jones Industrial Average has gained 19.2%, while the broader S&P 500 index is up 18.8%. The Nasdaq has also performed well, rising by 22.0% through February 27. Another star performer on the stock-market scene has been China, with the benchmark Shanghai Shenzhen CSI 300 Index gaining 22.2% since the beginning of the year.
Further fuel for this year’s rally came early during the week of February 25 with word that the U.S. and China were working toward a trade agreement and that the U.S. would delay higher tariffs on $200 billion worth of Chinese goods. While the market rally has been broad-based, taking with it emerging markets, as well as industrial metals and other commodities for the most part, some country’s stock markets have lagged behind.
“As we pointed out last week, Chinese sentiment does not seem to be bought to the same degree in Germany and South Korea, markets that have high sensitivity to changing economic activity in China,” Peter Garnry, head of equity strategy at Saxo Capital Markets, wrote in a February 25 post, discussing the decoupling of Chinese equities compared to other markets. “As long as we are not seeing those two markets confirming the Chinese sentiment we remain cautious on equities. The risk of mean reversion is extremely elevated.”1
Compared with the nearly 20.0% or more rise in the indexes cited above, Germany’s DAX is up only 8.8% this year through February 27, while South Korea’s Kospi Composite Index has gained 9.5% – still respectable, to be sure.
The rally also hasn’t lost much steam even though upcoming warning signs for the global economy continue to emerge. The OECD’s composite leading indicators released in mid-February showed easing growth momentum for the U.S., Canada and the euro area as a whole – including the larger economies of Germany, France and Italy, along with the United Kingdom.2
The OECD’s leading indicators is designed to spot early signals of turning points in business cycles, relative to trends six to nine months ahead in nearly 40 countries. Depending on the country, the leading indicators are at their lowest point in several years.
Meanwhile, despite signs that the U.S. and China are working towards a trade agreement, and hopes for a global manufacturing rebound with China as a main cog in the engine, the country’s latest purchasing managers index showed a further dip and signs of contraction.
The official purchasing managers index (PMI) fell in February for the third straight month, reaching its lowest level since February 2016. The index fell to 49.2, down from 49.5 in January. Manufacturing output contracted for the first time since January 2009.
“Unless the trade war truly turns into an extended truce, the weakening trend may not end quickly,” Iris Pang, Greater China economist at ING, said in a research note cited in this Reuters report. “As such we expect March’s PMI to fall, too.”3
So is the optimism in global markets not up to sync with economic data?
In an interview with MarketWatch, Octavio Costa, global macro analyst at Crescat Capital, argued that a bear market for stocks has already started. He pointed to flagging consumers’ assessment of their present situation, a global yield-curve inversion based on the difference between 30-year government bonds of nearly 15 nations and the current U.S. federal funds rate, and China’s credit bubble.
“In our view, September of 2018 marked the peak of the U.S. economic cycle. We are now seeing a typical bear market rally, and the next downward leg is likely to be just as abrupt as the first one,” Costa told MarketWatch. “It’s hard to pinpoint when exactly, but my best guess is between now and April.”4
Garnry, P. (2019, February 25). China’s extraordinary decoupling and why you should watch BASF. Saxo Capital Markets. Retrieved from: https://www.home.saxo/en-hk/insights/content-hub/articles/2019/02/25/chinas-decouping-is-extraordinary-watch-basf-for-glues-to-global-economy
Organisation for Economic Co-operation and Development. (2019, February 11). OECD CLIs continue to point to easing growth momentum in most major economies [Press Release]. Retrieved from: http://www.oecd.org/sdd/leading-indicators/composite-leading-indicators-cli-oecd-02-2019.pdf
Chen Y., Woo R. (2019, February 27). China February factory activity shrinks to three-year low, export orders worst in a decade. Reuters. Retrieved from: https://www.reuters.com/article/us-china-economy-pmi-manufacturing-offic/china-february-factory-activity-shrinks-to-three-year-low-export-orders-worst-in-a-decade-idUSKCN1QH0AD
Kollmeyer, B. (2019, February 27). Bear market for stocks already underway, recession coming, says Crescat Capital. MarketWatch. Retrieved from: https://www.marketwatch.com/story/bear-market-already-underway-recession-coming-says-crescat-capital-2019-02-27
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