E Markets: It Is Not Enough

Today is about logically insufficient conditions as investors are likely to see that the tape alone is not enough to support an extended rally up is risky assets. UK PM May faces her Brexit plan not having enough votes to pass and her government not having enough support to stand.  

China faces growth issues as the PBOC easing is not enough to support the economy and the government’s fiscal plans aren’t enough to help either. Though the rally back in risk today extends Beijing the courtesy of a bounce but with plenty of confusing signals. ECB Draghi faces the grim reality that negative rates and rolling over the bonds bought is insufficient to support the flagging economy and fight disinflation from lower oil prices. German GDP for 2018 was sharply lower than the previous 5 years even with better trade and a weaker EUR to support it.  Still, the nation has probably avoided a technical recession in 2H2018 with domestic demand key.  

If the problems in Europe’s strongest economy continue in 2019 its going to be harder for ECB action given the Draghi exit and plans for normalization. In the background, today is about doubt even as the tape bounces on China hopes and the usual squeeze back from a blue Monday. GBP is the center of attention but the actual votes seems a long time away for traders and its result likely already priced with a hard Brexit or another referendum the likely outcomes after the dust settles. Given that no one wants the PM job in the Tory Party – UK May is likely to lead until another election is forced where another hung Parliament produces more of the same. The GBP seems stuck in a bigger 1.26-1.31 range for the short-term and that maybe the foreshadowing for equities as the bounce up over the last 2 weeks seems not enough to break out for a larger rally. 

Question for the Day:Is the China effort to spur growth sufficient for 2019? Beijing intends to improve credit availability for smaller companies, accelerate infrastructure investment and cut taxes.Under the plan, Beijing will cut value-added tax rates for some companies, including in manufacturing, and hand tax rebates to others. China also plans to step up fiscal expenditure this year, in what looks like a Keynesian push to help companies. Xu Hongcai, Assistant Minister of Finance, told reporters in Beijing that the government was determined to ease the burden on small enterprises and the manufacturing industry, adding: “The focus is on enhancement and efficiency.” China’s central bank has promised to make monetary policy more forward-looking, flexible and targeted. The People’s Bank of China also vowed to keep liquidity “reasonably ample” - which could calm worries that firms could run short of funds. The country’s state planner has also weighed in. The National Development and Reform Commission (NDRC) said China will strengthen monitoring of its economic situation and improve its “reserve” of economic policies, as it targets “a good start” to 2019.

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