China beats expectations and Brexit avoids the cliff edge. What does it mean for markets?
On the latest edition of Market Week in Review, U.S. Institutional Senior Director Rob Cittadini and Senior Investment Strategist Paul Eitelman discuss recent economic data from China, the Brexit deadline extension, and the contrasting impact on global equity and fixed-income markets.
China’s total social financing numbers beat consensus
“We had some really important news overnight in China,” said Eitelman. “We know the path over 2018 was an experience of slowing Chinese growth, partly due to the trade war with the United States. Incrementally for some time, it looks like China’s been talking about delivering more stimulus to stabilize their economy. It’s starting to show through in some of the observable statistics now.” Eitelman explained that some of the data showed March numbers for China’s total social financing—which is basically credit growth for the Chinese economy. According to Eitelman, those numbers came in “very strong and well ahead of economists’ consensus expectations.” Eitelman gave credit to Chinese authorities and their efforts to stabilize growth rates. The impact of this consensus-beating news on other regional markets has been noticeable, said Eitelman. “Given that was a source of downside risk, we’re viewing this as a positive and greater conviction of potential flow through, not only to China in terms of stabilizing growth rates there, but it flows through as a positive for emerging markets, Europe, Japan, and, maybe to a lesser extent, the United States.”
Avoiding the Brexit cliff edge
Eitelman and Cittadini also saw positive news coming out of the UK in terms of an extension of the Brexit deadline. Eitelman referenced UK Prime Minister Theresa May’s recent negotiations, explaining that she was able to extend the timeline of Brexit to October 31. Eitelman said: “One thing we’ve learned about European politics, speaking to my colleagues in London, is that when there’s a really difficult issue to solve, the European politicians are good at sort of delaying those difficult issues and punting it down the road.” Eitelman explained that the delay and the associated uncertainty may be discouraging for the domestic UK economy. But for eurozone and other global markets, it’s generally a positive, because it helps to avoid a “cliff-edge scenario.”
The equity/fixed-income disconnect
Neither of these events this week happened in a vacuum. How did markets respond? Eitelman said that both these major news items set “a positive tone in terms of sentiment toward risky assets.” The MSCI All-Country World Index was modestly higher this week and has been very strong year-to-date in 2019. According to that index, the global equity market was up about two-tenths of a percent.
Compared to equities, fixed-income markets have been responding more significantly, explained Eitelman. “I think there’s been a bit of a disconnect between the equity market’s view and the bond market’s view. The equity market’s been rallying on some of this optimism for some time. The bond market, with very low interest rates, has had a more pessimistic view of recognizing some of these downside risks from China and global growth.”
Eitelman explained that with some of these stronger stimulus numbers and with a possible decrease of geopolitical risk, the fixed-income market has finally had to respond more significantly. “Relative to late March, when the 10-year Treasury yield was all the way down at 2.35%, it’s now snapped up all the way to 2.55%,” said Eitelman, calling out the significance of that 20-basis-point increase in such a short period of time. Eitelman noted that markets had to gravitate away from a view that the U.S. Federal Reserve and other central banks might need to cut rates, to thinking monetary policy decisions are more likely to keep rates on hold. “That’s been our expectation,” said Eitelman, “and I think if it does continue to come through in the data, we should see higher interest rates from here.”
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China’s total social financing numbers beat consensus
“We had some really important news overnight in China,” said Eitelman. “We know the path over 2018 was an experience of slowing Chinese growth, partly due to the trade war with the United States. Incrementally for some time, it looks like China’s been talking about delivering more stimulus to stabilize their economy. It’s starting to show through in some of the observable statistics now.” Eitelman explained that some of the data showed March numbers for China’s total social financing—which is basically credit growth for the Chinese economy. According to Eitelman, those numbers came in “very strong and well ahead of economists’ consensus expectations.” Eitelman gave credit to Chinese authorities and their efforts to stabilize growth rates. The impact of this consensus-beating news on other regional markets has been noticeable, said Eitelman. “Given that was a source of downside risk, we’re viewing this as a positive and greater conviction of potential flow through, not only to China in terms of stabilizing growth rates there, but it flows through as a positive for emerging markets, Europe, Japan, and, maybe to a lesser extent, the United States.”
Avoiding the Brexit cliff edge
Eitelman and Cittadini also saw positive news coming out of the UK in terms of an extension of the Brexit deadline. Eitelman referenced UK Prime Minister Theresa May’s recent negotiations, explaining that she was able to extend the timeline of Brexit to October 31. Eitelman said: “One thing we’ve learned about European politics, speaking to my colleagues in London, is that when there’s a really difficult issue to solve, the European politicians are good at sort of delaying those difficult issues and punting it down the road.” Eitelman explained that the delay and the associated uncertainty may be discouraging for the domestic UK economy. But for eurozone and other global markets, it’s generally a positive, because it helps to avoid a “cliff-edge scenario.”
The equity/fixed-income disconnect
Neither of these events this week happened in a vacuum. How did markets respond? Eitelman said that both these major news items set “a positive tone in terms of sentiment toward risky assets.” The MSCI All-Country World Index was modestly higher this week and has been very strong year-to-date in 2019. According to that index, the global equity market was up about two-tenths of a percent.
Compared to equities, fixed-income markets have been responding more significantly, explained Eitelman. “I think there’s been a bit of a disconnect between the equity market’s view and the bond market’s view. The equity market’s been rallying on some of this optimism for some time. The bond market, with very low interest rates, has had a more pessimistic view of recognizing some of these downside risks from China and global growth.”
Eitelman explained that with some of these stronger stimulus numbers and with a possible decrease of geopolitical risk, the fixed-income market has finally had to respond more significantly. “Relative to late March, when the 10-year Treasury yield was all the way down at 2.35%, it’s now snapped up all the way to 2.55%,” said Eitelman, calling out the significance of that 20-basis-point increase in such a short period of time. Eitelman noted that markets had to gravitate away from a view that the U.S. Federal Reserve and other central banks might need to cut rates, to thinking monetary policy decisions are more likely to keep rates on hold. “That’s been our expectation,” said Eitelman, “and I think if it does continue to come through in the data, we should see higher interest rates from here.”
Watch the video. Listen to the podcast. And subscribe.