Trader's View - Markets position for an eventful three days

Waiting, waiting, waiting

Another uneventful night in global markets, traders have apparently occupied themselves positioning for the ramp-up in economic data in the next 24 hours. Equity indices pulled back in North America and Europe, as global safe-have bonds caught a bid. Commodities fell across the board, naturally with the exception of gold, which ticked higher on haven-demand. The G10 currency complex was lifeless, with the Japanese Yen edging higher as the carry trade was unwound on anti-risk sentiment. And in line with overnight trade, after a flat day yesterday, SPI Futures are indicating the ASX 200 will drop 15 points come the open this morning.

IMF rubber-stamps growth outlook

The macro-event that caught most attention last night was the IMF’s anticipated downgrade to global growth. Given the loaded calendar from now until Friday, perhaps that update was an appropriate precursor to the litany of risk-events. As can be inferred from the description of overnight price action, the release wasn’t met with a great deal of surprise, reaction or volatility. However, the message was stark, and worth noting. In the wise-old-eyes of the IMF, global economic growth ought to slow down to 3.3% in the year ahead – a revision lower of its previous estimate in January of 3.5%.

Slow-down to be fleeting?

Despite all their resources and soft power, the IMF told market participants something that they sort of already knew – and more importantly, had already priced-in. Higher trade barriers have sapped trade-flows and growth in emerging-markets. The consequences have flowed to developed economies – especially those of the European Union, which collectively will slow down to 1.3% this year. For all this knowledge, risk assets remain supported. Maybe it’s this silver lining that’s keeping hope alive: although certainly below what its been in the past, forecasts suggest that the global economy will recover into the back end of 2019.

Bonds flashing amber signals

The growth picture beyond that is a little sketchy, though on-balance its probably not a positive one. It is a matter of debate as to what this all may mean in a contemporary context, but at least a recognition of what rates-markets may be suggesting about the longer-term growth outlook should be discounted. Yield curves across developed economies still portray an ugly kink in the 3-to-7-year sections, implying a marked economic slowdown, along with subsequent central bank policy intervention, the world over at around that time-period. Generally, market participants do seem cognizant of the fact, and are treating it with merit.

Make hay while the sun shines?

But its material consequences aren’t yet being felt: it’s a case of make-hay-while the sun shines. And as far as risk assets go, the momentum on Wall Street Indices, and to a lesser extent the ASX 200, can be somewhat attributed to this short-termism. Earnings growth prospects for the next quarter and next half are dim. Wall Street earnings season is practically upon us, and the series of revisions that have taken place since the start of 2019 has led to the consensus view earnings growth will have contracted by over 4%; in Australia, earnings growth is expected to stagnate.

Earnings forecast to improve, eventually

However, the bigger picture view is that earnings growth will turnaround. And in no small part it seems, markets are banking on a central-bank engineered turnaround in the global economy before year end. More than just a fall in discount rates, the projected recovery in sales growth across the S&P 500 speaks of a belief that demand can be sustained enough to keep delivering growth to US corporate’s top line. It’s here where the bulls and bears become divided: sure, a chase for yield and capital growth will support flows into equities, but is a lift an improvement in fundamentals really that likely?

The week to finally pick-up

It all rests on the fortunes and policymaking of the global economy’s triumvirate, of course: the US, Euro-zone and China. And the reason why the back-end of this week is significant is that key data is released out of all three that will illuminate whether markets are correct with their current bullish-view. The ECB meet this evening, with their thoughts on the continent’s short-term growth to be closely perused. US CPI and FOMC Minutes will be assessed in the context of confirming whether US interest rates will remain accommodative into the extended future. And Chinese CPI and trade balance will be carefully monitored when it arrives, too.