DBS Monthly – Searching for a breather
- The global economy is confronting trade wars on multiple fronts, broader China-US …
- ..power struggle, brewing US-Iran conflict, and secular slowdown in the electronics cycle
- FX: There is no correct amount of caution going into the Xi-Trump meeting
- Rates: Positioning across the different asset classes are likely to be light
- By many measures, the rally in developed market govvies looks stretched
Regardless of the outcome of the China-US trade talks, new fronts on trade war keep opening up. India has faced measures from the US, automakers in Asia and Europe are under threat (also from the US), while Mexico averted tariffs on the pretext of immigrant matters at the very last moment. We don’t see the Trump White House finding resolving any of these issues particularly urgent.
Then there is the broader China-US power struggle, ranging from cyber security to the South China Sea. Implicitly related to this is also the North Korea situation. Finally, alarming escalation has taken place with respect to Iran, darkening the outlook of crude oil and LNG supply.
Considering these headwinds, so far there has been remarkably little downside to economic growth worldwide.The Federal Reserve may be sounding increasingly dovish, but the economic dataflow hardly warrants a particularly defensive posture, in our view. The Atlanta Fed’s GDP Nowcast for the April-June quarter show hardly any concerning trends, with June data available so far show an economy still in good health.
Worldwide, asset markets have in fact rallied in expectation of policy support. Market participants are keen to find some room to breathe, but recent movement in gold and oil shows that risk aversion may have bottomed and is primed for a spike.
China’s slowdown has picked up after a supportive 1Q, feeding into the global policy easing narrative. Our Nowcast model sees steady decline in the growth momentum, with growth heading to 6% by 3Q. We think that weak demand out of China is a key reason why global crude oil prices have yet to spike despite the ongoing tensions in the Persian Gulf.
China’s slowing growth narrative
The challenge for global policy makers is not further easing; they are keen to ease in any case, in our view. The challenge is to figure out how to do this without running out of easing room quickly, and how to maintain financial stability at a time when debt will likely rise (from an already elevated level) in response to ease monetary policy. Meanwhile, risk assets are rallying, counter-intuitively given the growth concerns. Chances are that the Fed’s rate cut cycle this time will be shallow and short-lived. The ECB will find it hard to make negative rates become significantly more negative. China has cut rates considerably already, and short of getting into formal QE, their space is pretty narrow too. Search for breathing space may take investors to strange places.
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