Short Note                                                                              10 March 2016

The world exits panic?    

by Cees Bruggemans          words 680

The world remains an anxious place, going by commentary endlessly analysing potential and scenarios for crisis. But perhaps things aren't as threatening as what they appear to be.

Markets were screaming only two weeks ago that the world was ending. What has changed, getting them out of their nosedives? The world clearly wasn't ending after all.

 

In the US there has been for months a recession scare running, colouring all discourse. Yet US consumers remain positive, driven by job gains, rising nominal wages and falling energy costs (keeping inflation subdued, improving their real purchasing power).

In contrast, many US businesses remain cautious, worried about global events (China, Europe) and its impact on (trade) growth, there is all this talk about recession rubbing many up the wrong way, and the nature of the Donald Trump presidential campaign makes many uneasy.

The real issue may well be tempered animal spirits, left scarred by the financial crisis conditions of 2007-2009, and its global fallout, still echoing around the world. That things may not be safe, too many imbalances, too much untested policy excesses. If business sentiment has absorbed a major hit, keeping them from taking risk, the growth engine tends to be kept back.

It is a global phenomenon, also observable in rich regions like Europe and Japan (structurally struggling), bombed out commodity plays and many Emerging Markets caught out by the Chinese slowdown. With considerable global unease remaining about China, its growth repositioning, industrial overcapacity, and property and banking overhangs, with questions raised about adequacy and direction of financial reforms. And even deeper questions asked about EM corporate debt loads, central bank massive liquidity creations, the drift into negative interest rates and the response thereto.

Yet global growth continues, steadily in the US and also in China, consumer led.

The fact that the US 10yr Treasury yield is below 2% may have little to do with US domestic conditions (it isn't a sure-fire indication that recession is on the way) then that half these Treasury bonds are held by foreigners craving the certainty of American paper, and its yield still attractive, given own extreme low home yields (and uncertainty).

Though January and February saw severe financial market selloffs, these shocks weren't (close) enough to knock the US economy off its growth trajectory. With every new dataset comes the next opportunity to reconsider upside/downside trade offs.

Especially commodity markets appear to have been roiled in recent weeks. At first the tentative approaches between Russia & Saudi (leading nowhere) about deals to cap output, intended to lift energy prices. The mere possibility made markets more cautious.

And then in short succession yet another slate of pleasing US labour market data, with little in credit metrics suggesting a major falloff in activity shortly, followed by China signalling determination regarding economic growth (6.5%-7%) for the years ahead, indicative growth remains their main focus.

It must have made a few people more cautious about their investment plays, especially shorting commodities. As shorts were reduced in recent weeks, prices started to lift, creating yet more momentum for short reduction, spilling over into equities.

The unsettling panic of recent months seems to be subsiding, underlying data pointing to growth continuity, inviting more extreme financial positions to be reduced, in the process getting heavily sold-off market prices to rebound.

Goldman Sachs this week was quick to suggest the bear market in commodities isn't over yet. Marginal producers will use lifting commodity prices to sell output forward, capping any price increases, but also delaying the full rationalisation of excess commodity supply, while the demand growth trajectory has as yet hardly lifted.

To them, this could mean a resumption of the commodity bear market ere long.

The very fact, however, that markets have been checked by real data and possible market-moving policy actions is an indication that the global business and market climate is changing.

Even if there are more bouts of price volatility still ahead, the opening round of 2016 has been questioned and found too excessive. That, too, is an important pointer to what comes next. Even with all the questioning about what central banks think they are doing. 

 

Cees Bruggemans

Bruggemans & Associates, Consulting Economists

 

Website  www.bruggemans.co.za

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Short Profile Dr CW Bruggemans

Chairman, Bruggemans & Associates Consulting Economists

Consulting Economist, Avior Capital Markets

Consulting Economist, Ince (Pty) Ltd

Consulting Economist, Hellmann Logistics (Pty) Ltd

Consulting Economist, Bureau for Economic Research (BER), Stellenbosch

Honorary Professor of Economics, University of Stellenbosch