With a release of the Chinese PMI data for February we now know for sure that it’s the first month in nearly 7 years where such surveys pointed to a contraction in Eurozone, China and Japan. Should such a slowdown be a concern for investors? We take a look at this question in this analysis.
Summary:
- PMIs confirm slowdown in a global industry
- Industry problems now enough on their own to be a drag on equity markets
- DE30 at the key resistance line now
Manufacturing is struggling
The data from China confirmed that manufacturing has been struggling. February was the first month where PMIs for Eurozone, Japan and China landed below 50 points since October 2012. The first “dip” below this mark occurred in June 2016. Back then the slowdown occurred as financing conditions tightened and industry choked after the first major post-crisis recovery. When we revisit this last slowdown we can actually see it did not affected stock markets seriously. Yes, there were corrections on both US500 and DE30 but when PMIs dipped below 50 in all those 3 areas, stock indices were actually bottoming out. In the second half of 2012 the US500 rallied 12% and DE30 advanced by nearly 20%! Does this mean a rally is in store today as well?
Manufacturing conditions have been deteriorating in a way not seen since 2012. Source: Macrobond, XTB Research
Monetary policy had big impact on stocks
One should be careful to make simple conclusions. In 2012 the global economy was still in the early stage of the economic cycle and there was plenty of spare capacity after a devastating recession of 2009. This is not the case now as the global economic cycle enters its 10th year. What is even more critical Top3 central banks (Fed, ECB, BoJ) started their multiyear program of a massive balance sheet expansion (known as QE or money printing) while these net purchases turned negative late last year and should remain negative for the most of 2019. Even if the Fed refrains from interest rate increases, balance sheet reduction will have a tightening effect in a stark contrast with 2012.
Central banks no longer expand their balance sheets. Source: Macrobond, XTB Research
Therefore, the question is for how long this manufacturing slowdown lasts. Things like US-China trade deal or Brexit could go right and provide uncertainty relief but just as well we can see for instance introduction of US auto-tariffs that could cause a recession in industry worldwide so investors should pay a lot of attention to these developments.
DE30 at the crossroads
A revival on the European stocks has not been as spectacular as in the US but still DE30 recovered 11.5% since its December low. We can see a reverse head and shoulders formation but then again the index is at an upper limit of a downward channel that blocks a materialization of this formation. This technical conclusion could also tell us a lot about the near future.
Lack of conclusion this week will keep the situation open on the DE30 at the beginning of March. Source: xStation5
