Searching for the bottom of the global slowdown
Today's news headlines:
- ‘Corbyn’s best hope is a minority government, say backers’. Supporters inside the Labour leaders’ inner circle have stated that it’s unlikely Jeremy Corbyn can achieve a majority government in the upcoming election. In the event of a hung parliament, Corbyn’s backers think he has a strong opportunity to work with smaller opposition parties to form a workable coalition. Still, hurdles remain as the Lib Dem’s have pledged not to prop up a Labour government led by Corbyn and the price of SNP support would be a guaranteed referendum on Scottish independence. In addition, any of Corbyn’s left-wing campaign plans could be significantly watered down by coalition partners, reducing the Labour leaders’ credibility. (Financial Times)
- ‘Lam Calls for Peaceful End to Hong Kong Siege as Numbers Dwindle’. Hong Kong’s leader has asked both police and protestors to end the situation at Hong Kong’s Polytechnic University without further violence, with no immediate arrests for anyone under the age of 18 trapped on campus. She said that the unrest could only be resolved with the full cooperation of all involved, including the give up of any weapons held by protestors. Once again, the images out of Hong Kong made the region look more akin to a war zone than a centre of global finance. (Bloomberg)
With so little actual market action over the past several days, a lot of focus is invariably drawn towards political risks and the dissection of central banker views. On Sunday, the latest instalment of the Hong Kong protests caused some reflection over China’s broader political challenges (see our weekly commentary) but overnight the waters have quieted again. Instead, market speculation has shifted to the 30-minute closed-door meeting between Federal Reserve Chairman Jay Powell and Donald Trump. Predictably, the President took to Twitter directly after the meeting to remark on its ‘cordial’ nature but also to say he ‘protested’ that interest rates were too high. The Federal Reserve clarified that the Chairman answered questions but reiterated his official line on data dependence before further policy action. In other words, the Fed will wait for more ecostats to reveal the efficacy of the current policy settings before making any new decisions.
Shifting to Asia, the Reserve Bank of Australia published its policy meeting minutes last night and presented suitably strong language to suggest that another interest rate cut is imminent. The reason for this dovish shift is that wage growth, employment, and inflation have all been weaker in recent releases, but it’s clear the slowing of global growth is a primary catalyst for these effects. In particular, the slowing of its biggest trading partner, China (38% of total Australia trade flows in 2018), is undoubtedly having a significant impact. The prices of building materials and fuels (copper, iron ore, coal, etc.) have broadly declined over the past year, highlighting a weakness in global construction. In China, where demand for further infrastructure is cautious at this point in the economic cycle, an uptick in Australian commodity exports seems unlikely to occur in the near-term.
Bottom line: The questions aren’t so much about decline, that much is already occurring, but rather where is the bottom of this global slowdown? The saying is that it is always darkest before the dawn, but in markets, that is a very subjective measurement of bleakness. One thing that seems clear is that other central banks are less eager to drive looser monetary policy now that the Federal Reserve is seemingly at neutral pending further data. Monetary policy operates with a lag, and a new cycle operates with none; it’s a painful process waiting for the data to confirm a change, but that seems to be the destiny for markets heading into year-end
The currency pair traded marginally higher yesterday, although a lack of economic data meant there was little meaningful price action. We’re currently treading water around the 1.2950 level as markets prepare for tonight’s televised debate between Boris Johnson and Jeremy Corbyn; the Conservatives continue to poll well, indicating a solid lead. A move through the 1.30 mark could reinforce a bullish bias for the pair that has demonstrated decent upwards momentum over the past week.
As previously mentioned, solid polling data for the Conservatives has helped the Sterling trade-weighted Index hold onto its recent gains, keeping the pair around the 1.17 handle. Later in the session, the Euro benefitted from reports that the US President and the Chairman of the President of the Federal Reserve had discussed negative interest rates at a meeting yesterday.
Yesterday afternoon, the Dollar Index responded to the Trump-Powell meeting by falling to its lowest level in over a week. This meant the pair climbed briefly up to the 1.1090 level in a broad continuance of last week’s rebound. China’s focus on the unrest in Hong Kong means that it was a quiet day on the US-China trade front.