Are markets headed for a repeat of the plunge in the fourth quarter of 2018 amid growth, geopolitical and monetary policy concerns? Or is the general market context still modestly supportive of risky assets, even if there are bouts of heightened volatility?
- US non-farm payrolls for February were surprisingly weak, but multi-month average remains solid
- Equity market weakness has specific reasons
- Investor sentiment looks to be intact
Equity markets slipped, government bond yields fell and high-yield and emerging market bond spreads widened last week as concerns over global economic growth flared again.
Europe’s central bank announced fresh liquidity support, released lower growth forecasts and signalled a delay to any policy normalisation.
The latest - disappointing - US labour market data, weak Chinese trade numbers, and signs of a delay on a Sino-US trade accord provided further fuel for investor jitters.
Sifting the wheat from the chaff and being mindful of a wider perspective, though, should we be gloomy and prepare for another correction?
Exhibit 1: Bund yields take a knock, but gold still shines
Source: FactSet, BNP Paribas Asset Management; data as of 8 March 2019
While the latest ECB news pushed Bund yields down, reversing the capitulation we had seen just a week ago, gold by and large held its ground. These movements suggest to us that investors are still lingering in the risk-on camp and are not rushing off into traditional safe havens, as they would do if they now felt more concerned about global growth or a possible escalation of the Sino-US trade war.
In other words, we believe the latest market moves do not signal a turn in sentiment.
Instead, in our view, markets had become overly optimistic about the near-term chances of a China-US trade deal. Recent slippage reflected indications that the talks would not resolve the issues as quickly as thought.
Looking at the main markets, the more tenuous progress on a trade accord most affected China-related markets, particularly the tech sector in the US, and Japan, whose economy relies on trade with China. In relative terms, Europe outperformed, underscoring the local nature of the market drivers.
Markets: trade and payrolls data surprise
Fallout was also clearly felt in markets in China itself, which dove on much worse-than-expected trade data, particularly on the export side. We believe this does not signal a collapse in global demand, but rather that the timing of the Chinese New Year celebrations exaggerated the extent of the drop in exports. Indeed, the markets might well have overreacted. Nonetheless, there are clear signs of the impact of tariffs on Chinese exports to the US: year-on-year growth rates have turned negative.
The other recent surprise came in the form of an unexpectedly modest increase in US non-farm payrolls in February. Before getting carried away by one month’s data, a look at the three-month average shows that new job creations are still quite robust. Furthermore, the low payrolls number could well reflect a lack of labour supply – and not a drop in demand for workers as the economy slows. One indication of employers’ eagerness to hire is the continued uptrend in wages. In combination with a low unemployment rate, this augurs well for consumption, which is a major pillar under US GDP growth.
In all, we believe a repeat of the correction seen in late 2018 is not on the cards. On the whole, the economic outlook is still – modestly – positive, interest rates remain generally low, growth is decent and inflation muted. Lower-for-longer rates in Europe and an encouraging environment for US consumption also contribute to the currently supportive climate for risk assets. In our view, the recent market flutter was just a bump in the road, not a change in direction.
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