Trader’s thoughts – the discourse is all about growth

US equities flat

Barring some sort of shock in the last 2 hours of trade, Wall Street is ambling towards a “flat” day. The benchmark S&P 500 is a skerrick higher, on volumes below average. Resistance at 2815, and really the 2800 mark in general, has apparently become a psychological barrier for market participants. There seems little will to move the US equity market, with the losses and gains today coming very much on the margins. The technicals are still indicating that the S&P 500 has reached a short-term exhaustion point. The RSI has broken trend and stopped its climb in its tracks, while the MACD is flashing signs that momentum is shifting to the downside.

Equity rally losing substance

Several factors might be at play here. The growth outlook has improved and the VIX, while off its lows, is still at a paltry 14.63 currently. So, outright fear can’t be to blame. Furthermore, the major European, and a handful of the top Asian, indices clocked respectable gains yesterday. US equities just seem to be having trouble attracting buyers at these levels. The substance behind the big 2019 recovery on Wall Street has disappeared, too: the SMART Index has rolled over, suggesting big, institutional money has taken its profits for now. Perhaps the (slightly) improved outlook for global growth is reintroducing a recently forgotten phenomenon: US Treasury yields are climbing, possibly drawing capital away from equities.

Economic data beats

That’s still a longish bow to draw, especially given the unlikelihood global central banks will change their stance to monetary policy any time soon. Whatever the emerging trend in rates and bonds though, this week has welcomed some upside surprises to global economic data. To be explicit: such a time horizon is far too short to infer anything of substance about the state of the world. It’s all a sentiment thing, and last night’s solid US ISM Non-Manufacturing PMI and Building Approvals data, coupled with noteworthy beats in European and UK Services PMI numbers, warmed sentiment. A global growth slow down is still expected, but the debate in markets relates to its imminence, cause, and ultimate severity.

The trade-war and growth

Some are saying that a looming resolution to the trade-war, and a quite possible delay of Brexit can reverse the trend in the global growth outlook. The former is of greater import, of course. It pays in this instance to conceptualize where we are in the business cycle, when drawing such a link between geopolitics and economic growth. From what can be ascertained in the data, the global economy peaked in this cycle at the end of 2017 and start of 2018 – well before the trade war became the headline grabbing story it is now. Indeed, the trade war accelerated the slowdown, however its overall function ought to be considered an accelerant rather than the central cause.

Global growth

It might be sensible to consider where the global economy is now as “late cycle”, and still heading at some point in the medium term to a period of contraction. While a concern, the prolonged nature of cycles suggests that such a contraction might be many months to years away. What markets are currently experiencing in growth related assets – check-out an index of industrial metals, for one – is a short-term snap back to the overall multi-year trend. That is: the trade war forced traders to price in a more extreme slow-down than what the business cycle had in store. With that risk diminishing, markets return to a (possibly) more benign down trend.

Chinese Growth

The locus of global growth, as it has been throughout this slow down in global economic activity, is the Chinese economy. Its fortunes were quite literally put centre stage yesterday – embodied in Chinese Premier Li Keqiang at China’s National Party Conference. Economics was the primary concern of the event. The takeaway: Chinese policymakers are under-promising on economic performance this year, downgrading the national growth target to 6.0 -6.5%; but are also promising to over-deliver when it comes to the policy measures they’ll employ to combat this expected slow-down. This means more fiscal stimulus, mostly in the form of greater deficit spending, and a pledge to increase liquidity in the financial system by throwing long-term debt-concerns to the wind.

Australian Growth

Fittingly, Australia will get its economic health-check today, too. GDP is released this morning, and the feeling is that it has been some time since a GDP number has garnered such anticipation. The RBA met yesterday, and aside from leaving the cash rate at 1.50% for a 31st consecutive month, reiterated their belief that, based on a forecast tightening of the labour market and a subsequent lift in wage growth, the domestic economy still possesses the fundamental capacity to expand. Frankly, it's a view that's testing credulity, at least amongst market participants. Hence why today's GDP is important: an undershoot of today’s estimated 0.5% print will only add to the belief the RBA have got it all wrong.