Global Markets Review February 2020€¦ · cautiously optimistic on Europe’sinflation. •The...

Global Markets Review

February 2020

Oreana Private Wealth

A division of Oreana Financial Services

Economic Commentary – USA

Commentary

•The Fed left its policy rate unchanged in

January. The committee’s statement

promised to continue to inject liquidity

through open market purchases. The Market

has priced two rate cuts in 2020.

•GDP grew an annualized 2.1% in Q4. This

beat market expectations. Inflation for 2019

was just 1.6%, below the Fed’s 2 % target.

•Employment data remain strong. The

unemployment rate fell to a record low level.

Despite solid jobs growth through 2019,

wages growth remains tepid.

•Geopolitical risk remains elevated. A Phase 1

trade deal was signed between China and the

US. But difficult negotiations remain for any

Phase 2 deal. In early January, a US and Iran

conflict escalated briefly but avoided a hot

conflict. In late January and early February,

the US responded to the coronavirus

epidemic by banning flights from China –

introducing some uncertainty around the US-

China relationship.

Our near-term outlook

•We expect US GDP growth to move below

potential over the next 24 months.

•Labour market growth will continue to slow

as economic growth edges below potential.

•The Fed will remain on hold over H1 2020.

Rate cuts may be necessary in H2 2020.

Fig 1: GDP growth is set to slow in 2020

Source: Bloomberg LP, Oreana Financial Services

Note: Green indicates the latest data have improved over the time frame.

Red indicates the latest data have weakened over the time frame.

Fig 2: The Fed has indicated it will hold

rates steady for some time

Key Economic Statistics Latest Δ3m Δ6m Δ12m

Labour Market

Unemployment rate (%) 3.5 3.6 3.7 4

Employed persons (%yoy) 1.4 1.3 0.9 1.4

Households

Consumer Confidence 131.6 126.1 135.8 121.7

Retail sales (%yoy) 5.8 3.1 3.5 2.6


Housing

Case-Shiller House Prices

(%yoy)2.6 2.2 2.0 3.42

Existing Home Sales

(%yoy)10.8 4.2 0.6 -8.7

Business

NFIB Small Business

Optimism102.7 102.4 104.7 101.2

Manufacturing PMI47.8 48.5 51.3 55.5

-2

-1

0

1

2

3

4

5

Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18

GDP (yoy%, lhs)

GS Current Activity Indicator (rhs)

0

1

2

3

4

5

6

-1

0

1

2

3

4

5


Headline CPI inflation (%yoy, lhs)US Fed Policy rate (%, rhs)

Economic Commentary – Australia

Commentary

•The unemployment rate fell to 5.1% in

December. Jobs growth was concentrated in

part-time employment. Jobs growth has

been trending lower during 2019.

• Q4 core CPI inflation remained at 1.6%.

Inflation has remained below RBA’s 2-3%

target for several years. The market has

pushed pricing for further rate cuts to end-

2020 as headline inflation has trended higher.

•Housing finance, house prices and retail

sales improved during Q4 2019. The RBA has

indicated that momentum may be picking up

in response to rate cuts through 2019.

• Bushfires remain a considerable risk to the

economic outlook, albeit with limited impact

on December data. Australia is also

economically exposed to the coronavirus

through its economic links to China.


•We expect GDP growth to remain below

potential over the next 24 months. The

bushfires may be a near-term drag on

growth.

•The labour market has turned weaker. We

expect the unemployment rate to increase in

the medium-term.

•We expect the RBA will cut rates again in

2020. Ultimately we think quantitative easing

is likely within the next 24 months.

Fig 1: GDP growth could be at a turning

point but risks remain




Fig 2: The RBA has cut rates three times

last year but further cuts are likely


Labour Market

Unemployment rate (%) 5.1 5.3 5.2 5.1


Households

Westpac Consumer

Confidence93.4 92.8 96.5 99.6



Housing

RP-Rismark home prices

(%yoy)5.3 -2.5 -7.4 NA

Building approvals (%yoy) 2.7 -22.2 -28.3 -27.2

Business

NAB Business Confidence -1.9 1.9 3.6 3.7

AIG Performance of

Manufacturing Index45.4 51.6 51.3 52.5

1

2

3

4

5


GDP (yoy%, lhs)


0

2

4

6


Headline CPI inflation (%yoy, lhs)

RBA Policy rate (%, rhs)

Economic Commentary – Europe

Commentary

•The UK passed Brexit at the end of January.

Uncertainty nonetheless remains elevated as

the nature of Brexit will not be clear until

later in 2020.The EU and the UK will have 11

months to negotiate a new trade deal.

•The ECB kept its policy rate unchanged.

Committee members believe that the euro

zone’s manufacturing sector has bottomed

out from recent slowdown. Overall, ECB is

cautiously optimistic on Europe’s inflation.

•The ZEW survey of economic growth

improved dramatically in end-2019. But

industrial production and manufacturing

remains extremely weak. German growth

remains the driver of EU outcomes and that

could be at risk from German economic

exposure to China.


•We expect EU GDP growth to enter

recession within the next 24 months.

•A manufacturing recession is likely to impact

jobs growth, broadening the recession

through to the household sector.

•The ECB will not cut rates further. But further

quantitative easing is likely.

•Fiscal stimulus could prove to be supportive,

particularly in Germany. At best, we expect it

could reduce the depth and length of a

recession.

Fig 1: GDP growth has rolled over and is

in industrial recession




Fig 2: The ECB has limited capacity to cut

rates further


Labour Market



Households

Consumer Confidence -7.0 -7.5 -5.9 -7.6



Housing

House prices (%yoy) 4.1 4.1 4.2 4.6

Construction growth (%yoy) 3.8 0.9 2.0 1.4

Business

ZEW survey of economic

growth25.6 -23.5 -20.3 -20.9

Manufacturing PMI 46.4 46.2 46.6 50.6

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


GDP (yoy%, lhs)


-1

0

1

2

3

4



ECB Deposit rate (%, rhs)

Economic Commentary – Japan

Commentary

•Japan’s economy has registered some

improvement. But the coronavirus outbreak

could impact to Japan’s economy by hurting

its inbound tourism.

•The manufacturing sector remains in

contraction. The trade dispute and slowing

Chinese growth has weighted on Japan’s

growth and remains a near-term risk.

•But consumer confidence and retail sales

improved through the end of 2019.

•Inflation has improved to be around its

average level from the past four years.


•We expect Japanese GDP growth to slow

below potential with risk of recession after

taxes were implemented in October as

planned.

•Downside risks include trade disputes,

slowing global growth.

•We expect inflation will come under some

downside pressure over the next 12 months.

• The BoJ may introduce further easing

measures over the coming 12 months to

support slowing growth.

•The 2020 Olympics could benefit growth

through 2020.

Fig 1: GDP growth masks a weak

economy




Fig 2: The BoJ has managed to support

moderately higher inflation


Labour Market



Households


Retail sales (%yoy) -2.6 -7.0 -2.0 0.6


Housing

Nationwide land prices

(%yoy)1.2 0.7 0.7 0.7

Housing starts (%yoy) -7.9 -7.4 -4.1 1.1

Business

Tankan manufacturing

survey0.0 5.0 7.0 19.0


-5

-3

-1

1

3

5

Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18GDP (yoy%, lhs)


-2.0

-1.0

0.0

1.0

2.0

3.0

Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18Headline CPI inflation (%yoy, lhs)

Bank of Japan Policy rate (%, rhs)

Economic Commentary – China

Commentary

•China’s economic outlook has been

impacted by the coronavirus outbreak that

originated in Wuhan. Chinese policymakers’

responses have significantly disrupted

China’s economy and society through an

extended Chinese New Year holiday.

•China’s government introduced monetary

and fiscal stimulus to support the economy

against the impact of the coronavirus. China’s

economy had been stabilizing in Q4 against

cyclical headwinds but the near-term outlook

now is increasingly uncertain.

• China’s credit defaults were high relative to

history in 2019. Credit risks remain a key

uncertainty for the near- and medium-term

economic outlook in China


•We expect China GDP growth to slow to

below 6% over the next 24 months. Further

monetary and fiscal policy is likely to counter

the worst cyclical headwinds.

•Inflation has been boosted by pork prices

but underlying inflation remains subdued,

leaving further policy easing possible.

•The major risks to China’s economic outlook

remains a messy credit deleveraging and

ongoing trade dispute with the US. The

coronavirus could also have a significant

impact on growth.

Fig 1: Slowing GDP growth is set to

continue through 2020




Fig 2: CPI has trended higher, partly

reflecting food prices


Labour Market


Households




Housing

New Home Price (%MoM) 0.4 0.5 0.6 0.61

Business

Value Added of Industry YoY 102.7 102.4 104.7 101.2

Caixin China Manufacturing

PMI SA 51.1 51.7 49.9 48.3

4

6

8

10

12

Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18GDP (yoy%, lhs)


-2.0

0.0

2.0

4.0

6.0


7-day reverse repo rate

Economic Commentary – Hong Kong

Commentary

•Hong Kong is in a deep recession. The

recession is likely to be protracted as Hong

Kong suffers from ongoing political uncertainty

and the impact of the coronavirus.

•Government spending has been the only

positive contributor to GDP growth. Retail

sales, tourism, home sales and confidence are

all week and point to weak or negative

economic growth.

•The hospitality and retail sector remain at risk.

These are key drivers of economic growth. The

unemployment rate has started to move higher

as demand remains weak.


•We expect HK GDP growth to experience a

deep, protracted recession.

•US interest rates are too high for the HK

economy. This is likely to result in slower

inflation, further depressing growth in the

near-term.

•Fiscal support from the HK government and

stimulative policy coming out of China could

help the economy, but political tensions remain

a headwind.

•The HK housing market will be a key

economic risk for the next 24 months. We do

not expect a house-price crash as a most-likely

outcome, but risks are skewed to the

downside.

Fig 1: The HK economy is in a deep, and

likely protracted, recession




Fig 2: Inflation has peaked and is slowing

in the wake of the recession


Labour Market


Households


Retail sales (%yoy) 9.0 10.1 9.4 11.0


Housing

Beijing house prices (%yoy) 3.2% 6.0% 8.3% 8.6%

Business

NFIB Small Business

Optimism56.0 59.1 55.3 54.7



Labour Market

Unemployment rate (%)3.3 3.1 2.9 2.8

Real Wage growth (%yoy) 0.0 0.0 -0.1 1.0

Households

Private Consumer

Expenditure-3.4 -3.4 1.3 2.7

Retail sales (%yoy)-23.6 -24.4 -11.5 7.0


Housing

HK Private Domestic Prices

(%yoy)5.3 -2.3 -0.7 0.7

Home Sales (units) 3184 4001 4805 4543

Business

Business Tendency

Survery -25.0 -8.0 -1.0 2.0

Markit PMI 42.1 39.3 43.8 48.2

-6

-4

-2

0

2

4

6

8

10


GDP (yoy%, lhs)

-4

-2

0

2

4

6

8



US Fed Funds rate

Economic Commentary – Singapore

Commentary

• Singapore is a small open economy with

considerable trade and economic links with

China. The impact of the coronavirus epidemic

is uncertain but potentially significant.

• The Q4 advanced estimate for GDP was

reported at 0.8%. GDP growth has slowed

significantly in 2019, dragged by

manufacturing sector and Singapore’s

exposure to global growth. The services sectors

helped support growth, increasing through

2019.

•The unemployment rate increased to 2.3% in

2019. This is the highest rate over the past

decade since the global financial crisis.

•Retail sales have been contracting in year-on-

year terms for nine consecutive months. The

latest indication is that retail sales have

declined by 4% over 2019.


•We expect Singapore GDP growth to remain

below potential for next 24 months.

•Singapore’s economy remains exposed to a

global trade slowdown despite the US and

China Phase One trade deal.

•The recent coronavirus could also have a

significant impact on Singapore’s economy as

commodity prices drop, impacting export

values.

Fig 1: Growth has tumbled in 2019




Fig 2: Inflation has trended higher in 2019


Labour Market


Households


Retail sales (%yoy) 9.0 10.1 9.4 11.0


Housing

Beijing house prices (%yoy) 3.2% 6.0% 8.3% 8.6%

Business

NFIB Small Business

Optimism56.0 59.1 55.3 54.7



Labour Market

Unemployment rate (%)2.3 2.3 2.2 2.2

Real Wage growth (%yoy) 1.2 1.6 1.5 1.2

Households


Retail sales (%yoy)-4.0 -4.4 -1.5 7.6


Housing

House Prices CPI 88.4 86.8 87.1 87.889

Business

Business Manufacturing

Expectations-5.0 -5.0 -11.0 -14.0


-4

-2

0

2

4

6

8

10

-10

-6

-2

2

6

10


GDP (yoy%, lhs) GS Current Activity Indicator (rhs)

0

1

2

3

-1

0

1

2

3


Singapore Interbank Offered Rate (%, rhs)

Market Commentary - Equities

Fig 1: Australia equity has the best start in decades whilst

China is hit by coronavirus

Equities

•Global equities were initially knocked lower by the

outbreak of coronavirus in China, erasing early gains

in January.

•China and HK equities were impacted the most from

the coronavirus and dropped 2.3% and 6.7%

respectively.

•The S&P 500 ended the month slightly lower.

Positive earning surprises from financial and

technology sectors and the trade deal agreement

initially supported equities. But prices turned lower

after the coronavirus risk emerged.

•Australian equities were supported by better than

expected economic data from consumer and housing

sectors.

•Our near-term outlook

•We think equity markets look overvalued from a

fundamental perspective.

•Global growth has slowed and earnings growth is

low in absolute terms in the US. There is a risk of an

earnings recession through 2019.

•Australian equities have been supported primarily by

interest rate cuts. Earnings growth has not moved

substantially higher and the private sector outlook

suggests downward revisions are more likely.


-10%

-5%

0%

5%

10%

15%

20%

25%

30%

S&P/ASX200

S&P500 Nikkei225

HangSeng

CSI300 FTSE100 DAX 30 MSCI EM MSCIWorld

Australia US Japan HongKong

China UK Germany EM World

1 month Year to date 12 months

Market Commentary – Fixed Income

Fig 1: Global yields fell in January as the coronavirus resulted

in a strong risk-off sentimentFixed income

•Global yields fell in January. Uncertainty

surrounding the potential impact from the

coronavirus risk resulted in elevated risk aversion.

US and Australian 10-year yields fell 0.4% over

the month.

•Shorter dated yields fell less than longer dated

yields and yield curves flattened through January.

•High yield credit spread widened aggressively

following the coronavirus outbreak. The wider

spreads partly reflected the impact of sharply

lower oil prices on high yield debt issuers in the

US.

•Yields are now more than a full percentage point

lower compared to the start of 2019. Yields

remain near historic lows and have largely

reversed the sell-off higher in yields from end-

2019.


•US interest rate markets are pricing 1 rate cut

over 2020. We expect the Fed could be forced to

cut rates to close to zero and implement QE over

the next 24 months.

•Australian interest rate markets are pricing more

near-term rate cuts. We currently expect the RBA

will be forced to use QE when a recession hits

over the coming 12-15 months.Source: Bloomberg LP, Oreana Financial Services

0.0% 0.0%

-0.3%-0.4%

-0.3%

-0.4%

-0.8%

-1.1% -1.1%

-0.8%

-1.1%

-1.3%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

Fed Funds rate US 2 year US 10 year RBA cash AUD 3 year AUD 10 year

United States Australia


Market Commentary - FX

Fig 1: The AUD performance weakened against global FX amid risk

off sentiment

Currencies

•The AUD weakened against most developed

country currencies in the past month. Global risk

sentiment deteriorated from Iran-US geopolitical

tension and coronavirus outbreak.

•AUD/USD closed at 0.6692 in January.

•Weak fundamentals, low rates, and weak

commodity prices (ex-iron ore) remain a

headwind for the AUD in the medium term.

•Market pricing for RBA rate cuts has left

downwards pressure on the AUD.


•AUD forwards are priced for mild appreciation

versus the USD over the next 15-18 months. This

reflects market expectations for higher interest

rates in the US compared with Australia over that

period.

•We expect ongoing concerns around the

economic outlook to provide further support to

the USD and result in further weakness in the

AUD over this period.


-4.7%-4.2%

-3.6%

-4.9%-4.7%-4.2%

-3.6%

-4.9%

-8.0%-8.7%

-5.1%

-8.4%

-10%

-8%

-6%

-4%

-2%

0%

2%

AUD/USD AUD/GBP AUD/EUR AUD/YEN

US dollar British Pound Euro Japanese Yen


Market Commentary - FX

Fig 1: USD strengthened against CNH and AUD in JanuaryCurrencies

•The USD strengthened against most currencies

in December. DXY index climbed 1.04% in the

month amid risk-off sentiment in January.

•The USD was mixed versus most developed

market currencies over the past 12 months. It

performed well towards GBP and EUR and flat

against Yen.

•The USD/CNH touched 5-month-low at 6.8672

right after the Phase One trade deal was signed.

It rallied to 6.9984 sharply following the outbreak

of coronavirus.


•We expect slowing global growth and rising

volatility to leave the USD relatively strong over

the next 12 months. With many developed

economies suffering negative rates and dovish

central banks, the USD remains a high yielding

currency.

•The outlook is less certain versus JPY. We have a

low conviction view that the JPY will strengthen

over the next 24 months broadly in line with

forward market pricing.


4.9%

0.4%

1.1%

-0.2%

1.0%

8.8%

-0.7%

3.2%

-0.5%

1.2%

-2%

0%

2%

4%

6%

8%

10%

USD/AUD USD/GBP USD/EUR USD/JPY USD TWI

AUD dollar British Pound Euro Japanese Yen USD tradeweighted index


Market Commentary – Alternatives

Fig 1: Alternatives returns

Alternatives

•The asset class alternatives is a spectrum of return drivers and a very broad

asset class.

•Alternative strategies have offered lower correlation to global equities year

to date.

•YTD, equity market neutral has suffered as equites have rallied. Merger

arbitrage has also faced a challenging six months.

Outlook

•We expect alternatives will prove to be an important asset class over the

near-term. A diversified range of alternative return drivers could offer some

protection against equity beta in the event of a recession-driven market

correction.


*Data to November only.

Equity market

Index returns

% Return % Return % Return % Return

1 month Year to date 12 months 2019

MSCI World -0.7% -0.7% 15.5% 25.2%

FOF composite* 0.6% 0.6% 9.0% 8.3%

Equity hedge -0.3% -0.3% 6.2% 10.7%

Global Macro 0.8% 0.8% 7.8% 4.8%

Equity market neutral -1.5% -1.5% -3.5% -1.9%

Event Driven 0.5% 0.5% 7.8% 10.0%

Distressed Debt* 1.1% 1.1% 4.1% 2.9%

Merger Arbitrage 0.2% 0.2% -0.6% 0.2%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

1990

Recession

Asia Crisis 2001

Recession

2007

Recession

MSCI World Composite Alternatives

Distressed Debt Equity hedge

Global macro Equity market neutral

Event Driven Merger Arbitrage

Fig 2: Alternative returns through market downturns

Latest market pricing tables

Equity market Close at % Return % Return % Return

Index returns January-20 1 month Year to date 12 months

Australia S&P/ASX 200 7017 5.0% 24.3% 19.7%

US S&P500 3226 -0.2% 28.7% 19.3%

Japan Nikkei 225 23205 -1.9% 15.9% 11.7%

Hong Kong Hang Seng 26313 -6.7% 1.8% -5.8%

China CSI300 4004 -2.3% 33.0% 25.1%

UK FTSE100 7286 -3.4% 8.3% 4.6%

Germany DAX 30 12982 -2.0% 22.9% 16.2%


Note: Green indicates the latest market price is higher over the time

frame. Red indicates the latest market price is lower over the time frame.

FX market Close at % Return % Return % Return

Spot price January-20 1 month Year to date 12 months

US dollar AUD/USD 0.67 -4.7% -5.1% -8.0%

British Pound AUD/GBP 0.51 -4.2% -8.3% -8.7%

Euro AUD/EUR 0.60 -3.6% -1.9% -5.1%

Japanese Yen AUD/YEN 72.51 -4.9% -6.2% -8.4%

Fixed income market Close at Ppt change Ppt change Ppt change

January-20 1 month Year to date 12 months

Fed Funds rate 1.75% 0.0% -0.8% -0.8%

US 2 year 1.31% -0.3% -1.2% -1.1%

US 10 year 1.51% -0.4% -1.2% -1.1%

RBA cash 0.75% 0.0% -0.8% -0.8%

AUD 3 year 0.62% -0.3% -1.2% -1.1%

AUD 10 year 0.95% -0.4% -1.4% -1.3%

Bloomberg Global Agg Corporate Spread 103 5 -52 -33

Bloomberg Global corporate HY spread 393 47 -138 -44

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Global Markets Review February 2020€¦ · cautiously optimistic on Europe’sinflation. •The...

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Transcript of Global Markets Review February 2020€¦ · cautiously optimistic on Europe’sinflation. •The...