Week End Blog – Wanted: Easy Monetary Policy

Didn’t you love the military parade in China? Not because of the military ‘gadgets’ that were showcased, but primarily because Chinese markets were closed for a couple of days. Some peace and quiet, finally. Not that China didn’t make the headlines, though. Earlier this week, China’s official Manufacturing PMI fell below the 50-threshold for the first time since February. The Caixin (former HSBC) Manufacturing PMI, which is less gravitated towards state-owned enterprises, is at an even more worrying level of 47.3. This is not only bad news for the economy, but for the stock market as well.

This Friday morning, while China’s mainland markets were still closed, Markit revealed that the Hong Kong Manufacturing PMI fell to the lowest level in 80(!) months in August. That’s just ugly!

While China is dominating the headlines, its situation is not worse compared to other emerging markets. The overall Manufacturing PMI for emerging countries is also below the ‘magic’  level of 50. Moreover, emerging markets have trailed developed markets for 28 consecutive months now, underpinning growth is cooling down significantly.

The issues surrounding emerging markets, and notably those concerning China, have impacted investors anxiety. The VIX has skyrocketed.

As a result September started with some heavy losses in stock markets around the globe. This will probably strengthen the idea, which many investors seem to share, that September is the cruelest month for equities. But this is no longer the case. Quite the contrary, out of the last 10 September months, the German DAX Index has realized a positive return in 8 of them.

Volatility is not just constrained to equity markets. Implied volatility of Crude oil futures has increased to over 60%. Yes that´s 60%. This translates to some pretty impressive moves. The price of Crude oil managed to rise 30% in just 5 trading days, before slumping 10% in just two days.

The increased level of uncertainty about the health of the global economy has, in combination with stubbornly low inflation numbers, revived the discussion on the possibility of even more QE by central banks. This week the IMF revealed its in strong favor for easier monetary policy for longer. As the IMF stated global monetary policy ‘must’ stay accommodative.

During Thursday’s ECB press conference, Mr. Draghi revealed he agrees with the IMF’s view. While judging it too soon at this point in time to increase the ECB QE program, either by lengthening it, increase the amount of bond buying, or a combination of both, Draghi made it pretty clear the idea had crossed his mind.

Hence, Draghi managed to talk down the euro. Again.

European equity markets rallied after the Draghi speech, erasing the slump of September first. But, somehow, the message did not reach Asia, where Japanese stocks got hammered after the Hong Kong PMI data. This, in turn, sent European stocks down again. Don´t you just love volatility?

With the massive swings going on in financial markets right now, one thing should not be forgotten, however. Real bear markets tend to be followed by real recessions. At this point, though, I think it’s too early to assume a new recession is coming. China is, of course, the wild card here, but looking at current macro economic data does reveal many red flags. For now this should be considered as a ‘ healthy’ correction.

One example of decent macro data are the Eurozone retail sales, which rose 2.7% YoY in July. That’s even better than retail sales growth in the U.S. ISM in the U.S. was a little bit disappointing, but overall most data indicate the economy is still growing.

The Nonfarm payrolls number for August disappointed as well, but the number for July was revised upward at the same time. So, the ‘200K’-trend remains in tact. On top of that, macro data coming in a bit weaker than expected is perhaps not the end of the world, as they may entice the Fed to postpone its first rate hike.

Thank you for reading the Week End Blog! Enjoy your weekend.

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