E Markets: Retrenchment

You lose a trench-war by slow retreats, giving up non-essentials until you have lost the ground that matters and by extension the confidence of the soldiers as they suffer seemingly endless battles with nothing to show for their pain. The word retrenchment today has become synonymous with unemployment, downsizing, and cutting back excess from bloated budgets. Economies are the same, and as central bankers have become the generals they find little room to maneuver now. The spate of weaker global growth data mixed badly with the turnabout of central bankers deciding to ease back on normalization, as was the story fro the RBA or even ease as was the case of the RBI. Central bankers looked behind the curve of market confidence as many continue to fear geopolitical hits from Brexit and China trade cascading into their own economies. Take some chips off the casino table, run a bar-bell risk portfolio, fade January gains for a February snowstorm of renewed volatility – that is what investors heard from analysts this week.  Yet the price action was more 2018 divergence with US equities squeaking out a gain, most of Asia was closed for the Lunar New Year Holidays and reopened lower, while Europe suffered another set of growth doubts with the ECB Bulletin and EU Commission forecasts for 2019 growth sharply lower. The BOE also cut growth expectations for 2019 thanks to Brexit and deadlocked politics. The bond markets rallied sharply last week, as the central bank turnabout on normalization brought relief. The problem ahead is one about retrenchment and how globalization plays against divergence. The 4Q 2018 earnings have helped US shares but they also plant the seeds for trouble into 2019. The earnings for US globally facing companies highlight this point as earnings growth for them is almost half that of more domestic companies in 4Q and expected to be less than 1/3 in 2019.   

Question for the Week Ahead: Is this the inflection point for markets? The week ahead brings more US/China trade talks, more central bank meetings (Riksbank and RBNZ), more Brexit political moves as May presents Plan C and more hopes for a US Trump/democrat deal on the border wall even as talks breakdown over the weekend. The economic data will continue to matter as well with 4Q GDP reports for Japan, UK, Germany, and with the return of China leading to the usual key monthly reports on CPI, money supply and Trade. US CPI/PPI, retail sales, Michigan consumer sentiment, and industrial production will also matter. The question is whether any of these news events will be an inflection point for the markets. The retrenchment in central bank forecasts last week put the burden back onto China and its growth dynamics with the usual noise from front-loading lending into the new year key. Whether the credit push works in China like it did in 2009 or 2016 matters and seems very much in doubt. 

So the first inflection risk this week will be in the China data with imports viewed as a signal of internal demand, with total social finance seen as a signal on the credit/GDP pump continuing and with auto sales seen as the biggest consumer link to the rest of the world’s growth. Markets are geared up for CNY and 6.83-6.90 retest risks as well as something new from the government to spur demand. The reports on travel for the New Year Holiday are positive up 8.2% y/y to CNY613.9bn with travel up 16%. The money outflow from travel matters as does the rate for CNY upon the return of the market next week. Watch 6.7575 (200-day m.a. resistance) for upside risk Monday and through the week for 6.8380 55-day test risk. 

The second inflection risk this week is that German Bunds remain below the 0.15% breakdown and return to 0% or even negative rates. The 30Y Bund sale will be watched for the pain of funding with short rate. The spread of Bunds to BTPs are also in play with 3% Italian rates another factor.  Italian recession confirmation last week doesn’t play well with higher rates and weaker bank shares.

The biggest problem for investors into next week is that the rally back in global shares stalled last week after a 6-week run. The flow of money however has been paired with bonds– making this a central bank risk-parity blow-back with the risk-on and risk-off games likely to follow should volatility from any of the news events listed above come back to haunt as investors try to climb the wall of worry as 4Q earnings stories slow and real economic reports become the focus. 

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