Markets have been trading sideways last week with very low volumes not helped by US Thanksgiving holiday.
Over the weekend, strong Chinese data which further confirm the ongoing global growth rebound. China manufacturing PMI returned to expansionary territory for the first time in 7 months, increasing to 50.2 vs 49.3 prior while Caixin China non-manufacturing PMI also rebounded to 54.4 vs 53.1 consensus. A sub-index of new export orders climbed to seven-month high at 48.8 on easing trade tension, but was still in contraction. This morning also Caixin China manufacturing was stronger than consensus at 51.8 vs 51.7 prior.
Germany is facing political turmoil after the SPD elected a new left leadership duo, Norbert Walter-Borjans and Saskia Esken with 53% of votes on Saturday, beating the expected winner Olaf Scholz, who is pro-Merkel. Now the Grand Coalition might be at risk, as the new left leadership duo has called major concessions from Merkel’s Christian Democrats (CDU).
Black Friday sales with online sales hitting a record $7.4Bln in U.S. – a record and second biggest online sales behind 2018’s Cyber Monday of $7.9Bln (Adobe Analytics est Cyber Monday today will beat by 19%).
With the start of this week we should have a date for the US-China meeting on Phase 1 and next week we will have the important UK election. Things should start to heat up again.
In the meantime the Fed has added 19.62bn$ to the Fed’s not-QE balance sheet last week making the total to 270.4bn$ from the 11th of September with an average of 5.87bn$ a day vs an average of 2.79bn$ during QE3.
It seems that China needs a trade deal more than US. In the recent downturn, China’s investment capital expenditures, which contributes to China’s GDP at 44% (vs 20% for other economies), have been strongly hit because international and domestic investors are not investing due to uncertainty or even relocating abroad to avoid supply chain disruption.
Ironically, China would benefit from this trade war in the long-run as the economy is forced to be moving away from manufacturing to consumer spending (although China is being destroyed in the short-run). This is clearly intuitive from the chart below (Consumption as main component US GDP, Investment as main component China GDP).
Rising food inflation, mainly related to a 100% hike in pork prices, and foreign investor capital outflows (sum of current account surplus and the long-term capital account) are forcing the Chinese Central Bank to reduce monetary easing and maintain tight control of the monetary base and liquidity. Then Chinese capacity to keep adding stimulus is not that unlimited.
In addition, Trump is more confident than the Chinese as the Equity market is up to record high along with still solid consumer spending and might even be tempted to concede less and prolong the negotiations. All of this is suggesting that Chinese should be more prone to close the trade war as soon as possible.
Notwithstanding, others are saying that a phase one deal would unlikely be a real victory for both countries as phase two and three entail more important issues which China might be less willing to accept. Too much emphasis has been put on phase one deal without considering the core issues. If we are talking about wanting the Chinese to change their developed business model, reducing the state influence (Hong Kong), It’s very likely that we will be hearing about the word “trade war” for a long run.
In terms of flows, across US mutual funds and Exchange traded product we ended last week with global equity fund flows remaining net positive while US equity fund flows continue to be net negative in spite of rising markets. Ytd there have been a combined $147bn in domestic equity fund outflows, $47bn in international equity fund redemptions, and $386bn in bond fund inflows. Across all asset classes, mutual funds had small outflows ($542mm) for the third straight week with bond buying largely offsetting equity outflows.
Some flash statistics on US Mutual Fund performance. The shares of funds outperforming their benchmarks have declined through 2019 as Equities jumped to record highs, with the highest outperformance among large-cap funds with the most concentrated portfolios. Interestingly, the most overweight stock positions (funds with most consensus long) underperformed those with the most underweight positions (this makes sense if take into consideration the reflation trade along with positioning). Also, on average, in Q3 funds increased their allocation to Cyclical stocks (the highest in 2 years), Big Tech and China ADRs and cut exposure to Defensives.
Cyclicals (blue) vs Defensives (light)
Brazil is currently dealing with a massive devaluation of its currency, with Brazilian real reaching an all-time low vs USD, hovering around 4.28, almost 10% lower year-to-date.
The point here is that it seems there is a lot confusion in the country. Its Central Bank had to intervene on the open market to sustain the currency, selling its foreign reserves just after announcing that no one was concerned about this downturn.In addition, its Central Bank continues to cut rate in an effort to revive the economy/inflation after emerging from a brutal recession in late 2016, implicitly putting more downward pressure on its currency (lower rates, lower carry, lower FX as money are leaving the country).
Why is Brazilian Real so beaten up? Several reasons: domestic economy deteriorating, global trade war tensions rising, internal political protests along with instability in South America, internal economic reform process slowing down, unexpected political twist after Lula was let out of jail and the most recent country’s mega oil auction which failed to attract foreign capitals.
A final note on India, which was the fastest-growing economy in 2016 with quarterly rate as high as 9%, is now growing at the slowest pace since 2013, with Q3 GDP up 4.5% vs 5% YoY and declining core infrastructure industries’ output at 5.8%, the biggest contraction in 14 years. The Reserve Bank of India has cut official interest rates by 1.35% this year only, down to the lowest level since 2009.