Sterling and Brexit was the center of focus during the early part of last week. The parliament vote on Brexit was postponed to at least January. UK Prime Minister Theresa May survived leadership challenge but her position is shaky with more than one-third of her MPS voted against her. The visit to EU was seen as a complete failure by some as May only got some vague clarifications and assurance from EU. It’s still unknown how May could get the Brexit agreement through the Commons. Sterling ended as the weakest one last week after all.
On the other hand, Dollar ended as the strongest one, with the help from worries over global slowdown. In particular, China and Eurozone released some very poor data. But the US is not without it’s own problem. The sharp selloff in US stocks on Friday argues there are worries that global slowdown would eventually spread to the US. Yield curve has ended the week inversion between 2- and 5-years. Focus will turn to Fed’s rate hike this week, and more importantly, new economic projections.
More evidence of global slowdown…
Looking pass all the “specific” risks of Brexit, trade war, Italy budget and emerging markets, global slowdown is the main theme in the financial markets right now. In particular, China’s engine has slowed notably. November’s sharp deceleration in import growth from 21.4% yoy to 3.0% yoy and exports growth from 15.5% yoy to 5.4% yoy, in USD term, was the first alarm. Then industrial production growth slowed from 5.9% yoy to 5.4% yoy and retail sales slowed from 8.6% yoy to 8.1% yoy. The shift from export to domestic demand seemed not working well.
Turning to Eurozone, outlook is even worse. Eurozone December PMI composite dropped to 49-month low at 51.3, with PMI manufacturing at 35-month low of 51.4, PMI services at 49-month low at 51.4. German PMI composite dropped to 48-month low at 52.2. France PMI composite dropped 49.3, 30-month low and first contraction in 2 1/2 years. ECB President Mario Draghi said the policy maker’s discussion were with “continuing confidence with increasing caution”. But such description might need to change as growth momentum slows further in 2019.
The main positive development currently, is that US-China trade negotiations seemed to be making real progress. In particular, China as already started large purchase of US soybeans. Also, retaliation tariffs on US autos and parts were suspended for 90 days through March 31. It seems that both sides do want to make a deal and more information regarding China’s reforms could be released in the upcoming weeks.
But US isn’t immune
Trump claimed that China’s economy was growing much slower than anticipated because of “our trade war with them”. We won’t object to that. It’s just a matter of when the slowdown in China, and other parts of the world, would feed back, through the interconnected global economy, to the US. The US PMI composite dropped to 19-month low at 53.9 in December, which indicated that momentum is fading. And judging from the development in the stock and treasury markets, the US economy is far from being safe.
Over the week, DOW closed down -1.18%, S&P 500 lost -1.26% and NASDAQ dropped -0.84%. At the time same time DAX rose 0.72%, CAC rose 0.84% and FTSE rose 0.84% too. Asian markets were mixed only. Nikkei continued to suffer most and lost -1.40%. Singapore Strait Times lose -1.09%. But China Shanghai SSE was merely down -0.47%. Hong Kong HSI even closed up 0.12%.
DOW’s near term outlook is rather bearish with another close below 55 week EMA. As long as last week’s high at 24828.29 holds, further decline is in favor to extend the medium term correction from 26951.81. We’d maintain that, even though interim fluctuation could be seen, such correction should extend to 38.2% retracement of 15450.56 to 26951.81 at 22558.33 before completion.
US treasury yields somewhat stabilized last week but lacked momentum for meaningful recove