KINGSTON, NY, 17 APRIL 2019—What a difference a year makes.
In response to the U.S. Federal Reserve’s 2018 aggressive interest rate policy, equity markets across the globe tanked. The Dow had its worse December since the Great Depression, but following the Fed’s January U-turn and signals that there would be no rate hikes until 2020, the Dow Jones climbed 13 percent and the S&P 500 rose 15 percent this year.
And China, the world’s second largest economy, ended 2018 with its worse economic performance in a decade; its Shanghai index lost almost 25 percent year-over-year. In response, Beijing launched an aggressive fiscal stimulus initiatives to pump up its slowing economy.
As a result of the heavy doses of state-injected stimulus, the Shanghai spiked 30 percent since its 2018 close and the Shenzhen index has seen even greater gains, skyrocketing 40 percent this year.
Also, China’s Gross Domestic Product grew by 6.4 percent in the first quarter, surpassing the estimated 6.3 percent.
China’s industrial output surged 8.5 percent in March and retail sales were up 8.7 percent. Notably, the average new home price, which also reflects the positive effects of China’s stimulus policies and its rebound after a difficult start of the New Year, rose 10.6 percent in 70 cities on year in March.
It should be noted, however, that many respected economists and financial institutions question the veracity of the Chinese government’s data.
While the U.S. and China central banks have propped up their economies and markets with cheap money policies, across the Eurozone, with interest rates in negative territory and despite the "targeted longer term refinancing operation" designed to provide low cost loans, demand for loans dropped to zero in March from 9 percent last year, while manufacturing indices in major EU economies weakened.
Germany's manufacturing Purchasing Managers' Index (PMI) plunged from 47.6 in February to 44.7 in March and France’s PMI fell from 50.4 in February to 48.7. A reading below 50 reflects a contraction.
Indeed, industrial production across Europe declined in March by the sharpest degree in six years: Eurozone Manufacturing PMI posted a level of 47.5, down from 49.3 in February, the lowest mark since April 2013.
TREND FORECAST: Last week, the International Monetary Fund warned that global trade “has slowed sharply” while the CPB Netherlands Bureau for Economic Policy Analysis reported world trade volumes slumped 1.8 percent in the three months to January compared to the preceding three months.
However, Central Banks cheap money polices have triggered a corporate bond binge, with bond sales hitting a record pace globally for the year, reaching almost $747 billion, according to Dealogic.
Therefore, absent a wild card event (i.e., Middle East/Venezuela war and/or spiking oil prices), we forecast a modest rebound in economies and markets as more stimulus measures are implemented, thus pushing sidelined speculators back into equities and, in turn, increasing trading volume.
But again, these are only artificially induced temporary measures that are further inflating the $250 trillion global debt bubble. We will advise you when it is about to explode.