29 April to 05 May: President Trump spooked markets

Before President Trump unexpectedly threatened to further raise tariffs on Chinese imports,  the case for a meaningful and sustained improvement in global market sentiment has been building, as economic activity in the US remains convincingly solid in the context of low inflation and depressed (real) interest rates with the Fed being patient following through on its tightening agenda. Furthermore, recent macroeconomic data revealed that the broader Chinese economy has stabilised and is set to enjoy a cyclical upswing sooner rather than later. Therefore, by now the worries about a sharp global economic slowdown (and recession) have been proven wrong, in our view. However, investors are yet to fully appreciate the combination of firm economic growth, contained inflation and low (real) interest rates, as the broad market still focuses on downside risks to growth outlook. Further releases of strong macroeconomic data and a trade deal between the US and China would certainly relieve short-term market and economic stress facilitating a greater appetite for risky assets.

22 to 28 April: The glass can become more than half full this week

Investors have a very busy week ahead in terms of data releases and policy events. The economic diary in the US is fully packed with potentially market-moving data, such as the Fed’s preferred inflation gauge, the PCE deflator and the monthly jobs report (including the NFP, unemployment rate and earnings). The market will need to not only digest the two most relevant set of macro indicators in the US, but the Fed will also decide on monetary conditions. We concur with the broad market consensus that the FOMC will keep the Fed funds rate stable. However, the messages delivered by Chair Powell could easily stir markets and induce a shift in the general risk sentiment. And if these were not enough, talks between the US and China will restart in Beijing on Tuesday, where the two parties “will cover trade issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases and enforcement,” according to a statement released by the White House. In conclusion, if headlines from the US-China talks continue to become more constructive, inflation in the US remains benign and the Fed signals staying on put in the context of robust GDP growth, global market sentiment will have every reason to improve.

15 to 21 April: There are reasons to be optimistic about global growth

Economic activity data in China for the first quarter of this year came in stronger than the market’s expectations: real GDP growth was 6.4% YoY, maintaining a steady pace compared to the previous quarter. Furthermore, monthly macroeconomic data, such as industrial production growth (+8.5% YoY in March) surprised positively as well, since industrial output expansion hit a new, 4.5-year high. Both activity indicators confirm our longstanding view that global market sentiment has become excessively and unwarranted pessimistic on global growth prospects. The fact that industrial momentum has started to build in China implies – in our view – that the pace of global economic growth and world trade are likely to strengthen going forward. We will receive evidence this week how the US’ economy held up in 1Q19.

8 to 15 April: Switching to data-watching mode

As the global economy has been going through a phase of slowdown, markets have become increasingly jittery. Is a rebound in economic growth on the horizon that could improve global investor sentiment for a sustained period of time? A cyclical upswing in economic growth (including Europe and China) is likely to prevail soon in the next few quarters, as policymakers (especially central banks) have been doing their best to stimulate their economies. Thanks to the concerted efforts of central banks (e.g. the Fed, ECB, PBoC, RBI, etc.), further meaningful deceleration in underlying growth is highly unlikely, in our opinion, as we foresee a bounce in 2Q-3Q19. Whether the pick-up in growth will be sustained in the longer-term is difficult to tell at this point in time. To have greater clarity on growth prospects, Chinese GDP growth, monthly macro data in the US and the Fed’s Beige Book will be definitely the ones to watch this week.

1 to 7 April: Trade tensions are easing between the US and China

One of the obstacles hindering further improvement in global market sentiment is the trade dispute between the US and China. Finally, more constructive headlines were released citing that two countries have finally found some common ground, which ultimately could lead to a consensus in the coming few months. President Trump talked up prospects for a ‘monumental’ agreement, while refraining from providing granularity or evidence. Drafts of the agreement being crafted would give Beijing until 2025 to meet commitments on commodity purchases and allow American companies to wholly own enterprises in the Asian nation, according to people familiar with the talks. We remain of the view that a final resolution to the trade talks will not meaningfully change the fundamentals for global growth, as the US-China trade is about 3% of global trade. But global investor sentiment could surely benefit from some good news.

25 to 31 March: Growing pains; U.S. Q4 GDP revised down to 2.2%

The U.S. economy showed further signs of slowing as the 4Q18 GDP figure was revised down to 2.2%, which was significantly lower than the 2.6% initially reported. After business investment, consumer spending and local government expenditures were accounted for, the final GDP figure came in below economists forecast of 2.5%. The revised figure did not change the full year GDP growth rate, which remains at 2.9%. This was the slowest pace of growth since the first quarter 2018 and adds further questions surrounding the FED’s interest rate decisions for this year.

18 to 24 March: The US Treasury market is rattled by the idea of a recession

By the end of the week, headlines on almost all major media outlets screamed that a recession in the US is imminent, as the Treasury curve inverted. Simply put, the yield on the 10-year US Treasury fell below the yield quoted on the 3-month bill – although only by a basis point. This phenomenon usually – but not always – predicts that a recession in the US is lurking around the corner. We do not want to downplay the significance of the yield curve’s inversion, but we are nowhere near a hundred per cent convinced that a recession is inevitable for the following reasons:

• in the past, an inverting yield curve was not always followed by a recession,
• the ECB and the BoJ are unable to exit from their QE programmes, which deter some capital flows to the US weighing on Treasury yields,
• recent US macro data releases do not imply economic stagnation or a recession, in our view,
• and most importantly, due to the Fed’s extremely bloated balance sheet, nobody actually knows whether pre-crisis and pre-QE rules and correlations still apply, i.e. if the yield curve’s steepness is a reliable predictor.

We sustain our view that the economic slowdown in the US is a normalisation from a somewhat overheated state and a decent real GDP growth is achievable this year. But of course, we continue to monitor incoming macroeconomic data closely. In conclusion, as long as rates in the US are low, the USD relatively weak and global economic growth is not meaningfully hurt, EM asset prices have convincingly strong reasons to rise. However, as long as the market is unconvinced that the growth story is not meaningfully derailed, it is likely that concerns can weigh on investor sentiment.

11 to 17 March: How dovish the Fed will be on Wednesday?

The decision-making body of the Federal Reserve reconvenes on Wednesday to discuss whether the current monetary policy stance is appropriate. Since it is a quarter-end, the FOMC will release an updated macroeconomic projection, which is very unlikely to reflect any changes compared with the previous ones released in last December. The update of the “dot plot”– which contains the rate expectations by voting and non-voting members – could serve as a catalyst for a shift market sentiment, but the persistence and magnitude of the sentiment shift are probably going to be moderate. What is really worth paying attention to is the post-decision press conference and Q&A by Chair Powell, where he might (or might not) discuss the details of the balance sheet run-down and could announce a date when it ends. Should the Chair clearly communicate that the end of the balance sheet adjustment process is nigh, global market sentiment could (further) improve boosting appetite for risky assets.

4 to 10 March: Switching to data-watching mode

As the global economy has been going through a phase of slowdown, markets have become increasingly jittery. Is a rebound in economic growth on the horizon that could improve global investor sentiment for a sustained period of time? A cyclical upswing in economic growth (including Europe and China) is likely to prevail soon in the next few quarters, as policymakers (especially central banks) have been doing their best to stimulate their economies. Thanks to the concerted efforts of central banks (e.g. the Fed, ECB, PBoC, RBI, etc.), further meaningful deceleration in underlying growth is highly unlikely, in our opinion, as we foresee a bounce in 2Q-3Q19. Whether the pick-up in growth will be sustained in the longer-term is difficult to tell at this point in time. To have greater clarity on growth prospects, Chinese GDP growth, monthly macro data in the US and the Fed’s Beige Book will be definitely the ones to watch this week.

25 February to 3 March: The POTUS lashed out at the Fed, again

The President of the US was very vocal this weekend about his dissatisfaction with how the Fed conducts monetary policy. The POTUS lashed out at Jerome Powell, as he referenced the Fed Chair as a person who “likes raising interest rates,” “loves quantitative tightening” and “likes a very strong dollar.” Obviously, President Trump is not in love with any of the above. Although the President has the right to give voice to his opinion on the conduct of monetary policy, his remarks have little to no impact on the actual decision-making progress of the FOMC due to the strong institutional framework. So, does it really matter what President Trump says? To be honest, not really. The President’s claims can temporarily influence market sentiment and asset prices, but as long as no policy (re)action follows his jawboning, the landscape does not change fundamentally. Therefore, the Fed continue business as usual and decide on the appropriate course of monetary policy as before, i.e. based on the trinity of macroeconomic data, financial conditions and asset price developments.