Closed eyes to correction dangers

Today's news headlines:

‘Nigel Farage urged by allies to give PM clear run in key Labour seats’. The Brexit party leader has come under renewed pressure to stand-down more candidates from challenging for seats in the upcoming general election. Aaron Banks, one of the main 2016 Leave campaign funders, urged Farage to withdrawn from many Labour-held seats that could be captured by the Tories. Iain Duncan Smith echoed those sentiments, warning Mr Farage that he risked splitting the vote and potentially facilitating no Brexit. (Financial Times)
‘Angela Merkel urges EU to seize control of data from US tech titans’. German Chancellor Angela Merkel petitioned for Europe to reclaim data and develop its own platform to challenge Silicon Valley giants, Microsoft, Google, and Amazon in a move to challenge US dominance in the digital sector. She commented that many German companies had outsourced their data to US tech companies creating long-lasting dependencies. The question of digital sovereignty has become a more prominent issue in recent years due to comparisons between the Chinese state’s ability to access their citizens’ data and private US corporations that dominate the rest of the global market for data processing and storage. (Financial Times)

Full speed ahead

As the market becomes more secure about a conclusion to the interminable US-China trade dispute, risk assets—like equities—are continuing higher on a wave of enthusiasm. We’ve argued that this motivation is short-sighted and ignores the lack of fundamental growth to anchor these loftier prices. Our eyes are closing to the dangers of a correction because it’s becoming harder to rationalise some of the moves we have witnessed in markets.

Let us point out that economic data continues to print poorly. On Monday, UK Gross Domestic Product growth and manufacturing data was pretty horrible; this morning’s inflation releases were equally poor. Japan’s Economy Watchers Sentiment figure was the lowest in over eight years, and we’re expecting more bad news from the EU later today. Each of these readings is a single data point, so we don’t wish to arrogate to them a predictive power they don’t actually have. It’s instead the virtual perpetuity of declining fundamentals that tells the more important story of economic deterioration.

Not to belabour the point, but let’s consider that BRICS countries (Brazil, Russia, India, China, and South Africa) represent roughly 30% of global GDP. Brazil has rebounded from 2016 negative growth, but is only projected to grow by 1.0% in 2019; Russia is experiencing cautious expansion, again expecting circa 1.0% growth; both South Africa and India have been downgraded by Moody’s due to domestic turbulence; and South Africa is only expected to grow at 0.5% in 2019. India and China, the fastest growers in the pack, are forecast to expand by 6.2% and 6.1%, respectively. Those are strong numbers until you realise they are 12% and 7% slower than in 2018. This doesn’t paint a great picture of growth for 2019 and 2020, but what’s more worrying is what this slower growth reflects about developed market investment into the emerging market space.

Bottom line: While the risk-on enthusiasm persists, we anticipate current trading ranges to remain largely unchanged. It’s worth noting that overnight Donald Trump made some less-than-friendly noises about trade which might diminish some of the market’s ardour. We’ll be watching Federal Reserve Chairman Jerome Powell’s testimony this afternoon and Chinese data tonight for more hints on the global outlook.

GBP/USD

Yesterday’s UK labour data indicated a slowing in the sector as wage growth figures were subdued, but the Pound was instead focused on political developments surrounding the UK’s upcoming general election. There was a two-way move in yesterday’s session; the Pound initially moved lower as the Brexit Party leader refused to withdraw more candidates from hotly-contested constituencies. Later in the day, Sterling recaptured its losses as a YouGov poll suggested that the Conservative lead had grown.

GBP/EUR

Despite the initial optimism fading from the news that the Brexit Party had withdrawn from 317 Conservative constituencies, the GBP/EUR pair remains firmly in the upper tier of its recent trading range. A surprisingly good German ZEW Economic Sentiment figure actually did little to move the common currency as markets are possibly waiting in anticipation of tomorrow’s German Gross Domestic Product growth figure.

EUR/USD