E Dark Rooms

Back before digital, we had dark rooms to develop pictures. They were dangerous places with lots of chemicals and plenty of room for error as film revealed their images on expensive paper. The best quote for last week’s risk reduction came from ECB Draghi after the ECB added fresh stimulus: “The fact that the climate has become more uncertain doesn’t mean that one has to stay put. In a dark room you move with tiny steps,” he added. “You don’t run but you do move.” The question for the week ahead rests on how dark the room is for other regions with China a key focus. Over the weekend we got to focus on the China M2 and the belt and road push into EU politics. We also got more Brexit headlines and darkness in Venezuela - all of these stories are going to set the baseline for developing market mood into Monday as the risk-off Friday is likely to continue despite the best efforts of Draghi and the seasonal push for buying into 1Q end. The Ides of March risks seem higher than usual with the reversal of technology a blowback to the dangers of mixing the wrong monetary signals with political noise.

  • Does the China slower M2 and lower new loans mean there is less growth in 2Q? The stimulus of fresh credit and infrastructure spending rests on the PBOC policy. Over the weekend, China new CNY loans fell back to CNY885.8bn after the CNY3.23trn – this was less than the CNY975bn expected. Outstanding loan growth held 13.4% y/y as the PBOC noted, the Jan-Feb result was stable.  However, the total social financing drops to CNY703bn from CNY4.64trn – slowing to 10.1% from 10.4%, still above the 9.8% historic lows of December, but below the CNY1.3trn expected. The broad M2 money supply grew at 8% down from 8.4% - and below the 8.4% expected. Some of the decline in new lending may have resulted from government efforts to rein in speculative lending that was fueling the sharp rebound in the Chinese stock market. The PBOC Governor, after the release, promised “prudent” policy. There is still some room for the PBOC to cut reserve requirement ratios (RRRs), although the amount of room is less compared with a few years ago, Yi said.
  • Does the China Belt and Road help or hurt global growth in 2Q? There is a dynamic balance between the credit offered by China on infrastructure buildouts from the BRI and the US pushback against it mixed with the risk of too much unsustainable debt. Italy now wants to sign a China Belt and Road deal to help its exports. The Deputy PM Di Maio noted it was wasn’t about strengthening China political ties. “Let it be clear that, if we are looking at the Silk Road towards China for our exports, it is not to strike a political deal with China but only to help our companies,” he said. A spokesman for the White House’s group of national security advisers, Garrett Marquis, on Saturday called the Chinese venture a “vanity project” that Italy should steer clear of.
  • Will we get Brexit clarity this week? There is a clear bias in the market to own GBP for a 1.36-1.40 retest on Brexit certainty. The weekend brought further UK political news as the government pushed to win its vote on Wednesday. We have an opportunity now to leave on March 29 or shortly thereafter and it’s important we grasp that opportunity because there is wind in the sails of people trying to stop Brexit,” UK foreign minister Hunt told the BBC. “If you want to stop Brexit you only need to do three things: kill this deal, get an extension, and then have a second referendum. Within three weeks those people could have two of those three things ... and quite possibly the third one could be on the way.”
  • Do the Venezuela black outs mean the regime change is closer? Markets are watching oil, FX and regional LATAM for a shift should the weekend blackouts mean a regime change is closer. Thousands took to the streets on Saturday to protest the government of President Nicolás Maduro as a large power failure stretched into the weekend. Meanwhile, opposition leader Juan Guaidó said he planned to organize a tour of Venezuela in the coming days to rally support for a massive protest in the capital.

Question for the Week AheadWhat matters most the data or the reaction of central bankers to it?  The last week worries some investors as the fall in EUR and the hit to banks there highlight the issue of the ECB responding to the weaker 1Q data and their forecasts for a longer timeframe for the present soft patch. This begs the comparison to the FOMC and with the Fed meeting, March 20-21 the speeches this week set the tone with Powell likely to make clear that the balance sheet will be addressed. How the FOMC manages expectations matters and is likely more powerful than the present economic data which is mixed at best. The key NFIB and Michigan surveys are both out this week and are likely to bet the backdrop for understanding the goal of the FOMC in holding a “goldilocks” framework – not too hot or too cold for the US economy with only a dotted line reference to the world. The response of the PBOC to its total social financing data over the weekend was underwhelming and will also be in focus given the data on retail sales and industrial production this week. Further weakness in China growth will not sit well and lead to more talk of the PBOC cutting the RRR or more. QE and ZIRP are not solely the tools of the EU, Japan or the US. Of course, the other risk to markets is the reaction of politicians with the US President unlikely to support a Fed that remains normal and not supportive for his reelection or targeting the S&P500. This may be the key chart to consider

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