February 2019 Monthly Market Review

In February 2019, the market’s focus was mainly on the US-China trade negotiations and secondly on the more dovish monetary strategy decision made by the major Central Banks and the new stimulus measures in China.

Although no deal has been signed yet, the progress in the negotiations between the US and China has been significant. However, the industrial sector and technological sector stocks have already been impacted in the past few months and may face further difficulties if the negotiations will be longer.

Apple with its 14% of its sales done in the Chinese market and Boeing with an increasing market share are not the only companies that suffer. Apple’s CEO Tim Cook has also directly blamed the trade war for the poor iPhone sales in China during 2018. It is quite clear that China is already suffering from the consequences of the trade war with the US, with analysts suggesting that other countries will also feel the impact.

A trade agreement between US and China would lead to the stabilization of the Chinese currency. A stable and strong Renminbi will produce a flow of capital going into the Chinese economy and an outflow of capital from the US acting as a counterpoint to the potential stagnation of the US and the EU economies.

The global economy in 2018 grew above trend although it slowed in the second half of the year. The slower pace of growth has continued in the beginning of 2019 and the downside risks have increased. A big source of uncertainty remains the trade war between the two

biggest economic powers in the world. In China, the authorities have decided to cut the financial tax to stimulate growth and to improve the financing conditions, in response to the Chinese companies that are looking for more stable tax conditions in various countries across the world.

In general, inflation rates have moved lower following the earlier decline in oil prices, although core inflation has picked up in several economies. In most advanced economies, unemployment rates are low and wages growth has picked up.

The long-term bond yields have declined, consistent with the subdued outlook for inflation and lower expectations for future policy rates. Also, equity markets have risen, supported by growth in corporate earnings.

According to the OECD’s forecast, the global economic growth is expected to ease further from 3.6% in 2018 to 3.3% in 2019.The erosion of confidence due to political uncertainties, the continuing commercial tensions is contributing to the slowdown. Pending the resolution of negotiations between

the US and China, the duties already in force since last year are beginning to weigh on the economic engine.

The growth outlook in this unstable situation is being supported by business investments, higher levels of spending on public infrastructure and increased employment rates. The stronger labour market has led to some pick-up in wages growth, which is a positive development. The improvement in the labour market should see some further lift in wages growth over time, although this is still expected to be a gradual process. However, the focus continues to be the strength of household consumption in the context of weak growth in household income. A pick-up in growth in household income is nonetheless expected to support household spending considering that, thanks to the major Central Banks policies, the short-term bank funding costs will be moderate for next period.

At the same time, the changed dynamics of the housing market slowed the demand for credit by investors. The “dovish” signals recently sent by the major central banks have allowed the financial conditions not to worsen. On the other hand, however, the fact that monetary institutions slow down the path of normalizing their policies after the long years of zero rates and quantitative easing, represents a risk of possible greater “financial vulnerabilities” in the future. The hope is that dialogue will be intensified to prevent trade tariffs from being imposed on products: on the contrary, perhaps it would be desirable to stimulate further liberalization.

Some economists suggest that new trade wars are likely coming. The US are already threatening a 25% tariff on European Union (EU) car imports. Following a report from the US Department of Commerce, President Trump

has 90 days to evaluate whether to introduce higher tariffs on imported cars. Stock prices of companies such as BMW and Volkswagen are already affected. India will also be an important factor as it is estimated that it will become the third largest economy in the world by 2027.

Some experts think that the lower than anticipated worldwide growth could be attributed to the global drop in demand and investment and the reversal of the consumer credit cycle due to over-indebtedness recorded in the private sector. This theory partially explains why the US Federal Reserve (FED) will not reduce interest rates in a preventive way to support the economy and aims to make a clearer forecast, while some economists mention that it has become more “data dependent”.

The major Central Banks have stopped their quantitative tightening efforts, therefore the reduction of the Central Bank balance sheets implemented through the non-reinvestment of maturing securities. This represents a sharp revision compared to last year, during which Central Banks raised interest rates several times. This shift towards a more cautious attitude offers new hope at a time of slowing growth as it is expected it will bring a new wave of liquidity to the markets. A more accommodating attitude could even pave the way for interest rate cuts in some markets with higher carry that could follow the example of India.

Scrutinizing the data, the growth of Q4 2018 US GDP was moderated because of the Federal Services shutdown when a big part of Federal employees didn’t receive their paycheck. After a disappointing Retail Sales report, the latest Purchasing Managers Index (PMI) was good, fueling a 1.9% growth in the US economy. The S&P 500 recorded a quite negative return in February 2019. US equities are stable against the backdrop of macroeconomic data. Despite the encouraging data many forward-looking activity indicators continued to disappoint, building on the recent trend.

In Europe, even if the Consumer Confidence surged for the second month in a row, European Central Bank (ECB) economists Benoit Coeuré and Peter Praet expressed their concern about the slowdown in the Eurozone. The German economy was not able to grow. In Spain, the Prime minister Pedro Sanchez announced snap elections after the parliament did not give the support for the new budget plan. In Italy, there is increasing friction inside the government coalition due to the Lega’s stronger support in the recent regional administrative elections.

Japan’s GDP rose by 0.3% on a quarter to quarter basis and the Consumer Spending gained ground despite the poor exports due to the problems of the Chinese economy and the US China trade war. However, the forecast of Japan’s growth in 2019 is more negative than it was in 2018. The Bank of Japan (BoJ) declared that it would not change its ultra-accommodative monetary policy with the target of 2% inflation.

In Great Britain the chaos is still reigning. The UK services PMI fell to 50.1 and the companies are becoming reluctant due to the weaker demand. The agreement with Brussels doesn’t seem to be imminent according to media outlets. Prime Minister Theresa May seems to remain firm on her position. She is trying to obtain some concessions from the EU on the backstop arrangement regarding Northern Ireland. If a deal will not be stricken there will be a vote to check if the parliament would accept leaving the EU with no deal. The market is increasingly convinced that there is a higher chance the negotiation will continue after the March 29th deadline.