E Red Alert

When the red light flips on the car dashboard you are supposed to pay attention and get the vehicle checked out. Similarly, when the leader of the global recovery stalls, it’s a red alert for all risk position across assets – note China equity indices fell 4% last night. The reversal of equities this week culminated today with the China trade surplus shrinking, its exports falling over 20% and imports dropping as well. Talk that the US/China trade deal will take more time added to the weight of the report driving down the China share market for the first time in 5 days and hurting markets globally. The other story was that China is back to monitoring grey-market margins and is punishing some lenders for channeling money into stocks. Things got worse with Europe as German factory orders added to the gloom that ECB Draghi already spread yesterday. The reaction of markets to the ECB TLTRO was disappointing even as the central bank is the first to act to respond to global growth weakness. The fear that monetary policy is out of bullets and that fiscal is the only gun left working remains. This brings the market back to the US and its divergent growth hopes putting the jobs release again into the spotlight. While few would argue US jobs are anything but a lagging indicator – they still reflect the underlying economy and so the risk-off mood may temper if growth holds – i.e. if jobs are above 150,000, wages are steady to higher and job participation rises. The markets are waiting to see the FOMC reaction function to the data and to the ECB and foreign growth doubts. This puts the barometer for risk shifts back to the USD, which is watching 98 for a confirmation of bigger divergence and more confusion. Safe havens like JPY and Gold are back bid and may be also going higher with the USD after 8.31 am.  

Question for the DayAre emerging markets the next shoe to drop? As China goes, so goes EM markets. That is the usual wisdom, is this time different? The two biggest risks for 2Q maybe in China moving to QE and the US moving to intervene in the USD. The hope that the FOMC can prevent a broader global crisis in growth from spreading is not a strategy. The limits of monetary policy are showing through from the ECB yesterday. What is needed in Europe is fiscal stimulus. The measure of all growth fears remains the shape of the yield curve. For Europe with negative rates and QE, this remains positive but forced, like that of Japan. For the US it’s still not at the level where Powell will blink like Draghi. 

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Moon Kil Woong 8 months ago Contributor's comment

China is not the only one hurting. These trade war tariff games have gone on too long and is setting in to where their effects are spreading to all economies. This needs to be settled one way or the other soon or else the markets will come unsettled. That said, I am not convinced a market downturn will be as bad for oil as some are thinking it will be. Global instability tends to make oil hoarding by nations more common. That said most global instability in the past has been Middle East related.

The simple fact is the US is shooting itself in the foot in the oil market and the inventory buildup has been mainly centered in the US where its oil is not being consumed as the small oil plays keep dumping at a loss to keep from defaulting. This is not a global issue more than a domestic issue. Most global refineries are not geared for the oil being pulled up from fracking.