The ongoing demise of the "synchronised global growth" narrative - which started showing up in macro-economic data disappointments world-wide over a month ago - is beginning to become evident in capital markets as Nomura's Charlie McElligott points out that risk-asset weakness (and fixed income strength) hints at a growth peak and investor narratives shifting to a developing-acknowledgement that "the best may be behind us."
This perspective echoes SocGen's view that "the growth spurt is now behind us" as China's credit impulse fades.
Via Nomura's Charlie McElligott
Punchline - Risk assets are getting heavy (SPX -3.1% over past three sessions; WTI -4.4%; Copper -3.5%; EMFX -1.1% all over same period, with NKY -1.6% and DAX -1.7% overnight)while USD and US rates continue to “pain trade” squeeze higher, as a fresh trough of data shows the global growth narrative in danger of shifting lower (“still expansive but slowing”). Effectively, the “synchronized global growth” story is now beginning to be questioned by investors who are now open to the “evolved” idea we’ve been discussing recently--that “the best is now behind us,” as financial conditions continue their nascent “tightening.”
Overnight, we saw broad EZ and country-level Mfg PMIs falling from their peaks made in Dec / Jan. Week-to-date, we have now seen misses too with China Mfg PMI (both imports and new export orders saw outright CONTRACTION sub-50), slowing China Non-Manu PMI (contractions in selling prices, employment, new export orders and work backlogs), Japan Retail Sales (largest decline since Jan ’16) and Japan Industrial Production (largest drop since the tsunami in ’11). And despite the positives of recent US inflation-, wage- and labor- data, we are too seeing a “slowing,” with four consecutive “misses” the past few days in Durable Goods, Wholesale Inventories, Pending Home Sales and Chicago PMI.
Clients are increasingly cognizant of this “slowing” theme—especially with regards to China (see attached note from Nomura’s Rob Subbaraman et al“China is resuming its slowdown”). As previously discussed, China’s role in the global economy via both consumption, its role in the global supply chain and credit creation--thus, global inflation—is something I try to capture in the following “flow” chart:
With regards to this “slow data” impact on markets, as I have mentioned a few times recently, some feel that a slowing of data is actually a positive for risk-assets at this juncture, as it will force central banks to slow their “normalization” efforts and in-turn pause the tightening of financial conditions which have been behind this reintroduction to volatility in 2018. That makes a lot of sense in theory—however, I think it’s more nuanced than that.
The areas you’d want to see “slowing” are in the aforementioned inflation- and wages- categories…and not in industrial sectors, not in personal and household, not in retail and wholesale etc. And with focus on the Trump administration NAFTA dialogue and tariffs expected today on Steel and Aluminum (with the MUCH larger story in the background on “Section 301” / “intellectual property” area which would affect the Consumer Electronics space), we are talking about VERY REAL potential to dramatically accelerate US inflation in a “growth negative way.” So while still nowhere close to this environment at this instant, you are going to see a greater openness to discuss the potential of the dreaded “stagflation” in the months-ahead, which of course doesn’t speak positively for asset returns and / or sentiment.
Besides the data, what else has changed? Well, I think the Jerome Powell testimony played some part as well—and not simply the acknowledgement that a fourth dot will be added in March—as instead, his “upbeat” economic message was coupled with absolutely zero mention of downside risks, while downplaying the recent “tightening” of financial conditions. And that “non-mention mention” is important, coming from a guy who we know as per the recently released Fed transcripts from 2012 spoke about the impact of QE—and the ultimately reversal of the balance-sheet via “quantitative tightening”--in very “market-astute” terms.
Namely, Powell identified that markets were running with scissors due to the collectively central bank largesse which was incentivizing risk-taking and leverage. He acknowledged then that the Fed was essentially running a “short volatility position”! And that was in 2012, well before the global melt-up in financial asset valuations. Point-being, he “gets the joke” that some air needs to come out of the balloon.
“SHORT USD” EXPRESSIONS AT RISK INTO FURTHER SQUEEZE, AS EEM FINALLY CRACKS YESTERDAY:
As I’ve been highlighting since my first note at Nomura back in January, a stronger USD stands as the key “macro reversal risk” for much of the performance landscape, as many “crowded” macro trades (especially in the systematic / trend community) are effectively “short USD” expressions - namely, long SPX or NDX; long EM Equities and FX; long Euro; long Crude; long Gold; long Industrial Metals as starters.
CTA POSITIONING UPDATE:
So as one of the most-crowded yet too most-illiquid, it was critical to see EEM then lead the breakdown yesterday ahead of the pack, and crack SHARPLY below its 50dma. In conjunction with the “still-ongoing” break lower in commodities (energy and both precious- and industrial- metals), this one has potential to accelerate as it remains so overweight.