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Sentiments Turned Sour on Slowdown Worries, But No Panic Button Hit Yet

Looking through all the financial market news last week, the message was rather unified. That is, 2019 will be a year of slowdown, globally. Economic data, central banks, governments and independent organizations are all reinforcing this message. While ECB’s “pre-emptive” dovish turn triggered wild market reactions, it was just the nail for the case. The question now is whether the markets are pessimistic enough on the outlook.

Judging from the technical developments, we see that there are conditions in place for bearish reversals in stocks in US, Germany and Japan. But none of these indices confirmed reversal. Instead, late buying on Friday showed much underlying resilience. We believed the panic buttons weren’t hit yet. A lot will depend on upcoming developments in US-China trade negotiations and Brexit.

In the currency markets, Yen emerged as the biggest winner on risk aversion, and more so from reversal in global treasury yields. US 10-year yield hit as high as 2.759 on March 1 but closed just 2.625 last week, lowest since early January. German 10-year hit hit as high as 0.21, also on March 1, but closed the week at 0.071. New Zealand Dollar was the second strongest, US Dollar the third. On the other hand, Sterling was the weakest ones as crucial Brexit votes approach. Euro followed as second weakest on ECB.

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A quick recap on OECD, China, ECB, BoC, RBA and NFP

Let’s have quick recap on some important happenings last week. OECD lowered global growth forecast by -0.2% to 3.3% in 2019 and by -0.1% to 3.4% in 2020. In the Interim Economic Outlook, it’s noted that Chinese and European slowdown, and weakening global trade growth are the principal factors weighing on the world economy. For China, while policy stimulus should offset weak trade development, “risks remains of a sharper slowdown” that would hit global growth and trade.

China lowered 2019 GDP growth target to 6-6.5%. The lower bound at 6% would be the slowest pace of growth in nearly three decades. China plans to cut around CNY 2T in taxes and fees for companies, in particular manufacturers. Budget deficit is expected to climb 0.2% to 2.8% of GDP. Shockingly poor February trade data reinforced that China is facing “tough struggle” and serious impact from trade war. February alone, exports contracted -20.7% yoy, decline since February 2016. Imports also dropped -5.2% yoy.

The picture was better if we take out the distortion by Chinese New Year. January and February combined, exports dropped -4.6% yoy while imports dropped -3.1% yoy. These figures were not disastrous but still weak. Zooming into trade with US, the deterioration was rather drastic. Total trade with US dropped -19.9% yoy, exports dropped -14.1% yoy but imports dropped -35.1% yoy. Trade with EU wasn’t too bad, still recorded 3.7% yoy growth in total trade, 2.4% yoy rise in exports and 5.7% rise in imports.

European slowdown is another drag to global economy as noted by OECD. ECB’s statement, press conference and policy actions showed policy makers are in deep worry. Firstly, ECB changed the forward guidance and now expects to keep interest rates at present levels “at least through the end of 2019”, prolonged from “summer of 2019”. TLTRO-III is announced, quarterly from September 2019 through March 2021. It’s aiming at preserving favourable bank lending conditions, and smooth transition of monetary policy.

In the post meeting press conference, ECB President Mario Draghi said weakening in data points to a “sizeable moderation” in growth extends into 2019. Impact from slowdown in external demand and country/sector specific factors is “turning out to be somewhat longer-lasting”. GDP growth was “revised down substantially in 2019 and slightly in 2020”. GDP is projected to grow by 1.1% in 2019, 1.6% in 2020 and 1.5% in 2021. They compare to December’s projection of 1.7% in 2019, 1.7% in 2020 and 1.5% in 2021. Risks surrounding outlook are “still tilted to the downside”, due to “geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets.”

Talking about central banks, after leaving interest rate unchanged at 1.75%, BoC acknowledged that, as “recent data” suggested, global economic slowdown has been “more pronounced and widespread” than previously anticipated. The most surprisingly change comes from the monetary policy stance. BOC judged that the current economic developments “warrant a policy interest rate that is below its neutral range”. Moreover, “given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook”. In short, BoC has take a rate hike off the table, at least for now.

Another central bank RBA sounded confident. After leaving interest rate unchanged at 1.50%, RBA maintained the central scenarios of growth, inflation, employment outlook. And continued to expect the “gradual” progress of reducing unemployment and inflation returning to target. Governor Philip Lowe later said that wage growth is expected to offset negative impact from fall in house prices. However, Q4 GDP released, at just 0.2% qoq, was