After the disastrous December 2018 quarter (when the all country world index fell by over 13%), the March 2019 quarter staged an impressive comeback, rising by 11.6%. This was the second strongest quarter on record for the global index. The beaten-down Chinese market led the bounce, rallying 17.7%, with the US not far behind, closing 13.3% higher. [CHART1]
Although the strength of the rally can be largely attributed to the low base set in December 2018 it could, nevertheless, still be described as rather heroic given the truly dire economic conditions which prevailed.
The forward looking manufacturing PMI’s fell in most countries, with several sliding into contraction territory (including Europe and Japan). Although the U.S. manufacturing PMI remained in expansion mode, it dipped to a 21-month low, before rebounding later. [CHART 2] Forecast earnings across the globe continue to be cut, and the three months global earnings revision ratio remains in its year-long downswing.
In China, February exports fell 20% and imports declined by 5%. Auto sales plummeted by 14% and industrial profits also fell by 14%, highlighting the intense pressures facing
Asian economies from the US tariff threats.
And, to top it all, the 3 month Treasury yield rose above the 10 year yield (for the first time since 2007). [CHART 3] This inversion of the yield curve is a widely followed recession predictor and was caused by a sharp fall in the 10-year rate as bond dealers ploughed into Treasuries in the expectation of a possible US recession. [CHART 4] Fortunately it reversed a week later.
Equity markets recovery
What then were the factors that encouraged investors to ignore these dire economic conditions?
Perhaps of greatest importance was the Fed’s remarkable U-turn from a quite hawkish stance to a clearly dovish one. This allowed other global central banks to tilt towards easier monetary initiatives, in an almost 180 degree turn.
Stimulus measures introduced in China were expected to arrest the economic downswing. Clearly, much depended on significant progress in the US/China trade talks, but the postponing of the March planned tariffs added credibility to President Trump’s tweet citing ‘substantial progress’.
Finally, there were several ‘green shoots’ highlighted by economists which suggested – albeit rather tentatively – that the decline in global economic growth momentum was nearing a trough.
Green shoots and risks
The negative data cited above was partly influenced by the Government shutdown in the US, the ‘yellow vest’ disruptions in France, and the prospects of a US tariff hike which reverberated through Asia’s supply chain. These strains are now fading and while manufacturing PMI’s remain weak, the downward momentum has slowed.
Although the various China stimulus measures have yet to gain real traction, the expectation is that they will be sufficient to turn, or at least arrest, the downward slide in economic activity. In particular, the extensive tax and interest rate cuts should boost the economy, albeit that these will take some months to become effective.
Many of the ‘shoots’ are thus clearly tentative, and depend heavily on a positive outcome (for both sides) from the trade talks.
The greatest risk to the global economy (other than a failure of the trade negotiations) appears to be in Europe. The composite PMI has been falling for most of the past year and is well into contraction territory. With limited scope for further stimulus – and the Brexit impact still to be factored in – the outlook remains clouded.