Playing ‘Market Ouija’

We’ve had a pervasive theme for the best part of 2019, which reads something like this: Global growth is slowing while political uncertainty stemming from nationalism (e.g., Brexit) and its accompanying barriers to trade (e.g., America First) are making things much worse. 

Whether you agree with that statement or think its painting with a ‘broad brush’, in the current political environment it’s almost impossible not to have an opinion. However, it is vitally important to disentangle our own views and market views, to better understand what triggers market moves.

So, let’s take a moment to look in more detail ...  

The US/China Trade deal has been a thorn in the foot of global growth, causing it to run much slower than it otherwise would. The most dramatic impact has been from a supply chain perspective, but the monetary impact of tariffs is significant. The arrival of a phase one deal (probably early next year) should dramatically reduce headline risk and halt further barriers to trade. Subsequent movement to a second phase deal will provide breathing room for risk assets (e.g. equities) to appreciate in the latter part of next year. 

The slowdown in the Euro area appears to be bottoming, but at least the German/Dutch monetary conservatives on the ECB appear to not have enough power to rollback Mario Draghi’s outgoing monetary easing package. If we see a turnaround in German economic data in the next few months, the potential appreciation in risk-assets could be more pronounced in 2020. 

In the UK, Boris Johnson is trying to cast a wide net in the coming election which, if it results in a Tory majority, should rally the Pound into Q1 of 2020. Any subsequent hardships associated with establishment of new trade relationships is unclear and therefore does not factor heavily into the Pound, at the moment.

Bottom Line: While we disagree with this view in quite a few places, it broadly reflects the market view. It’s also an interesting counter-factual exercise, where we can hold up our own contentions, see where differences lie and ask ourselves, ‘why can’t that be true’. If nothing else, it gives you a sense of how the end of the year is shaping up and an interpretation of some potential triggers for market moves.To go even broader, we would observe that the market is waiting for political outcomes and signs of growth, particularly in Germany which has played such a vital role for the Euro area.

The week ahead

GBP

Another quiet week on the data front but loads of excitement to be found in news headlines now that both main parties have released their party’s manifesto. Sterling value seems to be positively correlated with the chances of a Tory win, make of that what you will. It’s quite light from a data perspective…perhaps for the best given the direct economic data has taken over the past month.

  • This morning CBI realised sales which remained moderately negative, a common trend throughout 2019.
  • On Friday, GfK Consumer Confidence is expected to remain at the lowest level since 2013 while Net Lending to Individuals is expected to reflect the high level of employment and remain steady at the same-ish level since 2016.

USD

At the moment, the US Dollar is trading based on a combination of economic data and US/China trade headlines. There are some worthwhile data points this week as we head into the US-bank-holiday calm of Thursday and Friday.

  • On Tuesday, US Consumer Confidence is anticipated to show a pretty flat picture of US consumer confidence since the beginning of 2018, while the Richmond Manufacturing Index is expected to post a mildly positive number.
  • Wednesday is the big day of the week from a data perspective. Durable goods orders are expected to post a modest decline, Preliminary GDP is expected to be lower than last quarter, Chicago Purchasing Manager Index is expected to be better than last month but still showing deterioration; and lastly, Personal Spending expected to stay steady as she goes.

EUR

The EU picture is frustratingly conflicted; asset prices continuing to rise while economic data continues to underwhelm.  Much like the UK, there isn’t much in the data calendar for the EU this week. Uncharacteristically, there is a great deal of focus on the European Central Bank since Lagarde took over and tries to heal a breach left by her predecessor who reinstituted fresh monetary easing.

  • German Ifo Business Climate, released earlier, seems to reflect a modest upturn in Germany – who only barely avoided recession – but it is worth noting that this is still one of the worst readings since 2010.
  • On Tuesday, German GfK Consumer Confidence is expected to remain in the same health range since 2015, though it has been markedly off the 2017-2018 highs over the past two quarters.
  • On Thursday, the strongly seasonal data series Month-on-month German CPI data is expected to show the first November decline since 2012.
  • On Friday, EU area CPI is expected to register a minuscule uplift this month but is really at the worst level since 2016. On the other hand, the Core CPI figure is showing a modest uptrend in CPI and arguably is better reflection of the economic reality.