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Global Growth: It is the virus or more deadly infection?

Global Growth: It is the virus or more deadly infection?

Last two years, I have been pointing out the slowing global growth and its potential impacts on the new decade.

All those warnings took place in my Oil and Indices reports.

IMF, WTO, OPEC OECD and the major Central Banks agreed on the potential risks of a slow down in Global Growth.

But what happened? Oil prices rose and hit 5 years record high, Indices made peaks: BUBBLES

I will not go into the details of my previous analysis but as I said before: If China catches a cold, the world becomes cancer. China is the locomotive of the Global Economy. The macroeconomic data were sending slow down signals while the market makers pumping the positive news about the Chinese economy.

The slowing down the Chinese economy is the real virus itself.

A few charts from Blomberg will help us to see the real situation:

Europe’s economies were essentially stagnant and U.S. demand downshifted at the end of 2019, prior to the coronavirus outbreak that further complicates the global growth outlook.

Here’s some of the charts that appeared on Bloomberg this week, offering a pictorial insight into the latest developments in the global economy.

The U.S:

Demand Fades

The government’s first reading on fourth-quarter growth showed gross domestic product minus the volatile inventory and trade components, a key indicator of consumer and business demand, posted one of the weakest readings since the end of 2015.

Spring is arriving early for the housing market. After recent data showed stronger fourth-quarter sales and construction, the Mortgage Bankers Association’s index of loan applications for home purchase climbed to the highest level since early 2009.

Europe

Euro-Area Growth
Region’s economy expanded just 0.1% in fourth quarter

The euro-area economy barely grew at the end of 2019 as unexpected contractions in France and Italy dealt the bloc its weakest quarter in almost seven years.

The U.K.

 

Stunted Growth
Britain faces a challenge to recover its pre-crisis economic growth rates

On the eve of Britain’s departure from the European Union, the Bank of England delivered a downbeat assessment of the medium-term outlook, with U.K. economic growth predicted to be less than 1% this year — the worst performance in a decade.

Asia:

The first official indicator of the Chinese economy in 2020 signaled the nation’s factories were struggling even before the country shut down for the Lunar New Year holidays and the coronavirus outbreak worsened.

Slow Expansion
India’s economy seen growing at slowest pace since 2009

Abandoned Indian developments tell the story of an economy in distress, a banking system in pain and consumers too worried about job cuts and rising costs to spend.

Emerging markets
Below Target, However It’s Sliced
Russia’s inflation is on another extended slide below the central bank’s 4% target

Russian inflation is on another extended slide below the central bank’s 4% goal, yet changing that target — as some have suggested — would be harmful.

Most Arab republics have witnessed popular protests since 2011 and these resulted in the government falling in four countries last year. Will they lead to better states and stable economies? The odds for success are low,according to Bloomberg Economics.

World
How Coronavirus Can Infect Global Supply Chains
Share of all imports of intermediate products coming from China

China is the world’s largest exporter of intermediate manufactured products — components destined for use in supply chains across the world. About 20% of global imports of those products came from China in 2015, according to Bloomberg Economics’ calculations based on OECD trade data. The longer the coronavirus curtails China’s industrial output, the bigger the risk of disruption to factories elsewhere.

Conclusion: The world’s economy was sick and coronavirus triggered the sickness.

What have we seen so far? All Major Central Banks – including the FED – went into more easing policies, Trump administration signed a deal with China, some speculative attacks to Oil Supplies. Oil and Indices rallied. “The show of the fakes.”

The problems is much bigger than the virus outbreak.

The impact of the virus:

Of course; there are potentially serious economic, corporate and market considerations. The virus has triggered a fairly typical reaction across financial markets, and one that has primarily focused on sectors and companies deemed the most vulnerable to the risk of a near-term growth shock from China. Shares and bonds in airlines, luxury goods, leisure and travel, banks and miners have slid over the past week as investors become anxious over Chinese demand for consumer and industrial goods.

Global companies with significant revenues tied to China are under the most selling pressure. Carmakers, tech and consumer groups reliant upon supply chains in Asia are scaling back some of their operations. This week, Apple issued a broader range of revenue guidance for the current quarter, reflecting the importance of the Chinese market for its components and its sales.

Investors have headed for the usual havens of gold and top-tier government bonds, and away from some of the more speculative forays of late — such as owning high-yielding emerging market currencies and energy debt. This shuffling of the market cards has not caused any great fall in global equities, with the MSCI World index down about 3 per cent since its January peak. That might not come as a surprise. In the past, once authorities seem to have viral outbreaks under control, market sentiment rapidly recovers.

Will it be the end of the story. No… It has just started.

There was plenty of scepticism about the likelihood of a robust economic bounce, judging by the recent pattern of trading within equities and across government bonds. Companies with strong revenue growth and stable earnings led the latest leg of the equity rally, leaving economically sensitive and cheaper stocks behind. That suggests caution. Another important marker of future growth expectations, government bond yields, began falling in late December — a trend that has only intensified over the past week.

On the equities side, the critical question is: First, do expensive US equities warrant buying after a dip in their valuations? Or should investors rotate towards cheaper global equities and focus on segments such as EMs, parts of Europe, the UK and Japan?

Last Words:

Given  facts are pointing out a sell off in the U.S and E.U equities. So we keep our bearish stance on Indices and Oil prices.

Technical Analysis and levels will be published in the forecasts.

Sources:

Bloomberg.com

Financial Times

BoE

NBS

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