E Like A Lion

Welcome to March, where markets like the weather, are greeted with the intensity of a fading trend be that winter or a bull market in risk or harsh economic data. The US GDP 4Q and better Chicago PMI led the selling of bonds yesterday and that supported the USD but it didn’t hurt risk moods. Overnight the China Caixin PMI was better even as Korea trade data was worse as exports fell sharply again. Japan saw better 4Q Capex, worse unemployment and weaker PMI. The focus in Europe was lower core HICP at 1% and as expected weak PMI reports. German jobs were stronger and retail sales robust. This data all matters but seems less of the driver for risk-on everywhere as its still all about US/China trade talks leading to a deal. The fear of a no-deal Brexit is also significantly lower and so that helps markets in Europe and the UK. Data becomes important when geopolitical fears are lower and that describes the start of March – the lion is more a symbol of strength than of volatility as the first 2 months of 2019 have been kind to passive investors chasing momentum and looking for carry. Whether this can change in March will rest on the data dependency of central bankers and their reaction functions. Markets are set up for another test of 2800 in S&P500, which is the upper boundary of many value players. Without better data, the run up in global risk will seem more hope than fact.  For those looking for a barometer – watch the AUD/JPY – its back in play with carry, US/China trade hopes, the rush up copper prices and the seemingly eternal easy money of the BOJ. The AUD will be waiting for the RBA and GDP next week and some confirmation of the easing expectations priced into the market. Until we break 80.75 the lion of the 2019 recovery may still just be a lamb in the making. 

Question for the DayAre we near the growth bottom? The better US Chicago PMI yesterday, the stronger Caixin China PMI today (almost at flat 49.9), better Japan 4Q Capex and hopes for a US/China trade deal mixed with FOMC patience and other central banks easy money – all put many analysts into the “green shoots” camp for global growth. Of course, the markets appear to have already priced this theme. 

However, there are other stories that conflict with this like the ASEAN February Manufacturing PMI at 49.6 from 49.7 – this is the first back-to-back loss in 2-years as new orders continue to drop as foreign sales contract for the 7th month. This isn’t a bottom but a continuation of trouble that holds from 4Q. The hope for growth needs facts to prove the point and make it real. Today’s US ISM will be watched accordingly. There is one silver lining in the divergence of the region and in that Indonesia and Vietnam maybe the key places to watch to confirm a bottoming out for the region.  

What Happened?

  • Korea February trade surplus $3.1bn from $1.34bn – more than $1.5bn expected. Exports fell by 11.1% y/y to $39.56bn after a -5.8% y/y drop – worse than -7% y/y expected – 3rd month of declines, worst since July 2016 driven by weak semiconductor demand. DRAM chip prices are off 36.8% and NAND off 25.2%. Car shipments rose for 3rd month with India notable destination, while steel rose for 2nd month with US and Japan orders. Imports fell at 12.6% to $36.47bn. 
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