Alarm Bells Ring in Markets as Nomura and Goldman Worry About Growth
(Bloomberg) -- Markets got high on synchronized growth, but the buzz is fading and an urgent question is taking its place: Will they get another fix?
The omens aren’t great. A slew of barometers, from stock prices and raw materials to computer-chip makers, are now signaling that expansion in major economies is decelerating in concert. In some cases these bellwethers are even overshooting recent weak data, raising the possibility that economic indicators are poised to get worse.
“The market has proven to be a very effective forecaster,” Nomura Holdings’ London-based strategists Kevin Gaynor and Sam Bonney wrote in a Nov. 9 note. “Upfront we would expect further moderation in growth data over the next few months.”
Such a development threatens to further undercut equities and credit, already battered by trade wars, valuation fears and rising rates.
Goldman Sachs Group Inc. strategists are telling clients to be ready for “a sustained period of low returns” and slower expansion. The central macro scenario of Amundi Asset Management, one of Europe’s biggest money managers, is a “multi-speed slowdown” that risks becoming synchronized. The firm says the year will end with a disjointed global economy and increased downside risks.
For Goldman, the slowdown can be seen in the relationship between stocks and purchasing managers indexes. The two are correlated, and equities have tracked PMIs as they show a drop in global industrial demand.
“Everything in the global industrial economy peaked at the start of the year, and it seems that the weakening trend will continue into next year,” said Colin Hamilton, managing director for commodities research at BMO Capital Markets Ltd.. “If you take strong global industrial output out of the picture, then that leaves so much more slack for consumers to pick up.”
Nomura recommends investors reduce exposure to equities and credit and increase defensive holdings in government bonds and cash, based on a proprietary trading model that points to a slowdown in growth.
HSBC Holdings Plc offered similar advice Wednesday. Slower global growth projections will weigh on risk assets so investors are better off in the safety of developed-market bonds and should be happy to take duration risk with longer-dated debt, the bank’s strategists said.
Stocks “well above sustainable long-run averages” on earnings-per-share and growth metrics are likely to be revised downward during the next quarter, according to Nomura’s Gaynor and Bonney.
Chips Are Down
Meanwhile, shares of Apple Inc. plunged on Monday, capping the worst seven-day stretch in two years after a supplier said one of its largest customers had asked it to reduce shipments. Speculation is rife that the customer was Apple, and fear of a sales slowdown triggered an equity slump across the supply chain.
The episode has reminded investors that consumers may not be on hand to prop up growth -- a fact also borne out by the rapid build-up in inventory at chip manufacturers.
“Semiconductor stocks typically lead the overall market,” said Fred Hickey, author of the High-Tech Strategist newsletter. He’s betting against Nvidia, Intel and Cisco Systems. “No one wants to get caught sitting on a lot of inventory when prices are in rapid decline -- especially so during economic downturns.”
The Philadelphia Stock Exchange Semiconductor Index plummeted 12 percent in October, the biggest monthly drop in more than eight years.
Black and Yellow
Tumbling oil prices also point to further weakening for global expansion -- particularly when measured against gold.
Even as sanctions were reimposed on Iran, U.S. crude is on the longest losing streak on record as slower economic activity constrains demand, according to Capital Economics. The gold-oil ratio, a proxy for how havens perform versus industrial assets, has jumped toward 18 this week from below 14 in early October.
“The world economy has lost some steam in recent months and is likely to slow much further in the next couple of years,” chief economist Caroline Bain and her team wrote in a note. They see WTI falling to $55 as the market moves into surplus next year, pushing the ratio the metal above 23.
It’s not clear cut, though. Crude’s retreat in November may have more to do with supply than demand -- a crucial distinction for using oil to gauge global growth.
Commodity markets have plenty more insight to offer. The ratio of raw-materials prices to initial jobless claims -- an economic gauge known as the Boom-Bust Barometer at Yardeni Research -- is tumbling from a record peak.
It’s fallen for the past eight weeks in the longest losing streak since 2009. Tracking industrial inputs like copper, steel and lead scraps, the metric has fallen before or during the past four recessions.
Meanwhile, the currency market shows that economies in commodity-producing nations are under increasing pressure.
The Australian dollar, Brazilian real and South African rand have dropped against major peers this year, and taken an extra hit from dollar strength as their exports became more expensive. These currencies are often treated as proxies for global industrial demand, because their current account balances depend on factories buying raw materials.
Mercifully, global growth remains above trend and the likes of Goldman make clear they see sustained low returns, rather than a bearish regime ravaging markets. But the landscape is changing and there are multiple challenges ahead, as Amundi notes.
“At the macroeconomic level, the global expansion is due to continue,” the manager’s strategists wrote in the firm’s 2019 Outlook. “But it will be challenged by higher uncertainty compared with months ago.”
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