E Markets: Pendulums

Question for the Week AheadCan China grow at 6.0-6.5% in 2019?

The rolling over of Chinese growth has been a concern for months. The long-held view that CNY weakness will follow any PBOC rate cuts hasn’t played out in the last week. Instead, markets see a technical 6.80 break in USD/CNY opening 6.71 and 6.65 tests should US/China trade talks lead to a deal or another truce extension. Muddling through at 6% growth still sounds exciting to investors. The CNY appears to be in a winning position but the cost of too strong a currency to keep money at home and attract foreign flows for bonds and stocks maybe a harder issue for Beijing. The trade conflict has plenty of blame for moving growth expectations lower into 2019.  The Nikkei Asian Review cover story on winners and losers is worth considering as it lists the flow of relocating production with Taiwan clearly thinking differently. Direct and indirect impacts are making the supply chains in Asia shift with the winners in other regions notable.  

While the focus is on China and the trade negotiations, if you talk with global CEOs it’s about FX (USD strength), raw materials, wages and labor market tightness and then perhaps trade policy which is right next to European weakness and energy costs. The point is that China/US trade isn’t sufficient to lift up investment and other plans for 2019. The confidence game in play for growth globally rests on the credibility of the central bankers still. This is where the value of FX kicks in and the work on FX valuation from DB is worth highlighting into the next quarter. If you want to believe in China 6% plus growth you will need to see the CNY move back to 7. 

Market Recap:

The extension of the global risk rally led by Asia and China/US trade talk hopes was the key story for the last week. The US government shutdown and USD weakness was also in play supported by dovish enough sounding FOMC comments and minutes. The data was weaker almost everywhere but ignored. The US Services ISM fell more than expected and suggests industrial weakness maybe spreading. The CPI in the US was in line with core at 2.2% y/y. Powell remains “patient” on further rate hikes.

Trump canceled his WEF Davos trip due to the government shutdown slashing hopes for a Xi/Trump handshake on trade. The FOMC minutes support the view of a 1Q rate pause with data dependency still key, and some nod to market stability (financial conditions). The announcement by Ford that it was cutting jobs in Europe and the expectations for a Brexit delay plan B also mattered last week – lifting GBP, hurting auto sector despite tariff relief hopes. 

Equities:

The MSCI all-country World Index rose 2.89% to 473.26 on the week. The MSCI EM index rose 3.75% to 1,001.11 on the week. Asia led the rebound. 

  • The S&P 500 rose 2.54% to 2,596.26 on the week. Thursday, the S&P 500 was up over 10% from its Dec 24 correction lows.  The industrials led the rally with energy a close second. The DJIA rose 2.4% to 23,995.95 on the week – also up over 10% from its lows - while the NASDAQ rose 3.45% to 6,971.48 on the week. The Cboe VIX fell 14.92% to 18.19% on the week – its almost 50% down from the Dec 24 36.07 highs. 
  • The Stoxx Europe 600 rose 1.69% to 349.20 on the week. Friday highs just over 350 make clear the technical resistance matters while focus remains on banks, oil and Autos for trouble. The German DAX rose 1.11% to 10,887.46 on the week. The French CAC40 rose 0.93% to 4,781.34. The UK FTSE rose 1.18% to 6,918.18 on the week. The Italian FTSE MIB rose 2.43% to 19,290.09 on the week. 
  • The MSCI Asia Pacific Index rose 4.08% on the week. The Japan Nikkei 225 rose 4.08% to 20,359.70 on the week. The Hong Kong Hang Seng rose 4.06% to 26,667.27 on the week. The China Shanghai Composite rose 1.55% to 2,553.83 on the week. The India S&P/CNX Nifty rose 0.63% to 10,794.95 on the week. The Korea Kospi rose 3.25% to 2,075.57 on the week and the Australia ASX rose 2.78% to 5,834.80 on the week. 

Fixed Income:

Between higher equities, supply globally and at hope with corporate issuances mattering – US bonds ended the week lower with many wondering if the best prices for 2019 have already been seen in many government bond markets. Better equities have supported credit with HY up on oil and the return to yield chasing as portfolios are rethought and reallocated. The focus in Europe was back on safe-havens with UK/Italy troubles leading to German gains. 

  • US bonds sold with curve kinks after supply, FOMC minutes: 2Y up 5bps to 2.55%, 3Y up 4bps to 2.52%, 5Y up 3bps to 2.53%, 10Y up 3bps to 2.70%, 30Y up 6bps to 3.04%.
  • Canadian 10-year bond yields rose 3bps to 1.96% on the week– BOC holding as expected, oil and data supportive for more action.
  • Japan JGB yields rose 6bps to 0.02% on the week– supply, equities and BOJ moving back to “normal” even as data drags. 
  • Australian 10-year bond yields off 2bps to 2.30% on the week with focus on China, supply and weaker data. 
  • UK Gilt yields rose 1bps to 1.29% on the week with Brexit delay thinking in play – politics vs. data. 
  • German Bund yields fell 3bps to 0.18% on the week with data weaker, ECB next key.
  • French OAT yields fell 6bps to 0.66% on the week with weaker data/Macron political trouble focus.
  • Italian BTP yields rose 2bps to 2.91% on the week with focus on politics/immigration deals/weaker growth and banks. 
  • Spanish Bono yields fell 2bps to 1.46% on the week– politics and growth keys.
  • Portugal 10-year bond yields fell 10bp to 1.71% on the week with focus on growth/budget.
  • Greek 10-year bond yields fell 10bps to 4.30% on the week– vote of confidence key – election risks rising.  
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