Trader's thoughts - The world economy’s health is looking worse than previously imagined

The monumental tug-of war between improving financial conditions and deteriorating economic conditions continues.

Global growth the primary issue right now

The monumental tug-of war between improving financial conditions and deteriorating economic conditions continues. On Friday, it was the latter that took home the points, if only this time around. Both variables truly sit diametrically opposed, and as far as market participants are concerned, which force will prevail remains speculative. It’s written into the mixed-messages markets have been signalling in the last several weeks. It must be said, with the end of last week’s trade, such discrepancies are becoming less pronounced. The dominating concern pertains to the outlook for global economic growth. The world economy’s health is looking worse than previously imagined, and the re-introduction of dovish rhetoric from global central bankers is proving an inadequate remedy.

European growth (seemingly) imploding

A crumbling of European economic growth prospects is at the epicentre of concerns. European PMI numbers were released on Friday night, and they were shocking. As has been the trend of late, the services element of the data releases were respectable enough. But manufacturing PMI in Europe is falling off a cliff and has dropped well into “contractionary” territory. Most troubling, is that the core of this is apparently being driven by weakness in Europe’s power-house economy, Germany. Remembering 50 is a neutral print when it come to PMI data: German Manufacturing PMI printed a woeful 44.7. It’s a reminder that with all the risks plaguing the global economy from East-to-West, its Europe that’s stuck in the middle of it all.

A return to a negative-yield world

The consequences of the bad PMI numbers were immediate and explicit. The yield on 10 Year German Bunds raced to its ignominious and long-awaited milestone, cracking into negative yield for the first time since mid-2016. If there is any evidence necessary that the global economy is at the end of a cycle, it’s that tit-bit of information. The rush into government bonds on Friday was ubiquitous, however, and has created some worrying price action. Conspicuously, the rush into US Treasuries has put the yield US 10 Year Treasuries to just above the current US OCR at 2.40%. Furthermore, Japanese Bond Yields have travelled further into negative territory itself, with the 10 Year JGB yielding -0.08%.

Currency traders seek-out JPY and USD

Reactions in currency markets have been somewhat predictable. The Euro has been slapped down below the 1.13 handle, as traders seek their safety primarily in the Japanese Yen, but also the USD. The Greenback spiked to end last week, edging once more well into the 96 handle, according to the DXY. The CAD, NZD and AUD are also down, however perhaps not by as much as circumstances ought to dictate. The Scandi currencies are also mixed because of Europe's woes, as is the Swiss Franc, despite its status as safe-haven. And even in the face of US Dollar strength, the growing list of safe-securities delivering negative yield has supported the appeal of Gold, which is fetching $1315 per ounce.

Rate cuts being priced-in across the globe

The falling yield environment is, of course, being driven by a pricing-in interest rate cuts in developed economies the world-over. Though directly caught in the fray on this occasion, as far as the disappointing data goes, the materialising prospecting of weak global demand has seen traders boost their bets on a US rate cut in the next 12 months. The implied probability of a cut from the US Federal Reserve by January next year leapt to almost 80%. The price action has led to a disturbing event in rates markets: the spread between 3 Year and 10 Year Treasuries has fallen to 0 basis points, inverting the yield curve between those two maturities.

Recession risk considered to be higher

Although not an infallible indicator, such a signal is often cited as portending a recession in the not-too-distant future. It might be for this reason that despite the pricing in on Friday of more activist central bank's globally, equities were generally thumped. The S&P500 was down 1.90%, dragged lower by stocks in the US tech-sector. Of maybe greater concern was the more domestic growth sensitive, small-cap Russell 2000 index: it fell by quite a remarkable 3.62% on Friday. This lead sets up the Asian region for a tough start to the week. SPI Futures are indicating the ASX 200 will clock a 50-point loss at the opening this morning.

Trump and May to seize focus today

Unfortunately, too, the economic calendar today and (relatively speaking) the rest of the week, is looking quite empty. Inferring from what was dominating the financial press over the weekend, it will be politics on both sides of the Atlantic that will capture attention. Brexit rolls on, and volatility in the Pound is expected to rise as noises about UK PM Theresa May's leadership rises to a cacophony. And out this morning: early days, but Robert Mueller's report on collusion between the campaign team of US President Trump and the Russian Government during the 2016 US Presidential has found no conclusive evidence to support that allegation.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Sell
Buy
Updated
Change

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Sell
Buy
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
China 300
-
-
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.