Market comment 2019

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The collapse of an index measuring sentiment among French services companies was an extreme version of several negative-looking charts coming out of Europe last week. Junk bonds have gone through the roof, meaning the credit quality of European companies is getting worse. There is an industrial recession in Germany. The continent will probably avoid a full-blown recession — but it is looking fragile. Here's a summary of recent data.

Europe economic GDP growth data: heading into recession? - Business Insider

The single most worrying issue in the European economy right now is the ongoing collapse of German manufacturing. Last week, another raft of factory sentiment data came out and the charts look ugly: Analysts are saying things like "grim," "misery," "horrific," and "this is a serious recession warning in the German economy." While the European Central Bank is flashing warnings about the economic health of the whole region — President Mario Draghi on Wednesday said he might halt rate rises on a slump in demand — Germany is especially alarming.

'This is a serious recession warning in the German economy' - Business Insider

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Not good, this..

An unexpected contraction in Singapore’s economy and a slump in China’s exports sent a warning shot to the world economy as simmering trade tensions wilt business confidence and activity. Gross domestic product in export-reliant Singapore shrank an annualized 3.4% in the second quarter from the previous three months, the biggest decline since 2012. China trade figures showed exports fell 1.3% in June from a year ago and imports shrank a more-than-expected 7.3%. You've reached your free article limit.

Bad News for World Trade as Singapore Slumps, China Exports Drop - Bloomberg

The world’s largest supplier of consumer goods says China’s factories are getting “urgent and desperate” as worried U.S. retailers accelerate a move out of the country amid heightened trade tensions. China will see more factory shutdowns as the trade war that’s roiled the global supply chain exacerbates an exodus, said Spencer Fung, chief executive officer of Li & Fung Ltd.The company, which designs, sources and transports consumer goods from Asia for some of the world’s biggest retailers including Walmart and Nike, is being pushed by American clients to shift production out of China.

 Trade War Threatens Chinese Factories' Existence, Supplier Says - Bloomberg

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Three of Europe's largest economies are under threat of recession, which could spell a crisis across Europe. Dozens of companies in Germany have turned to "short-time" work — cutting employee hours — a canary in the coal mine of industrial weakness Britain could also already be in a recession despite having not left the EU due to the uncertainty caused by Brexit.

 The UK, German and Italian economies are all tanking at the same time | Markets Insider

This year, for a variety of reasons, and some we will touch on in this article, domestic production and shale growth in particular have hit a wall. The latest report from EIA shows a decline that breaks the upward trend line.

 U.S. Shale: Peak Oil Finally Arrives | Seeking Alpha

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Some caution is warranted:

He warns a U.S. recession is on the doorstep, the Fed can’t help and the S&P 500 SPX, -0.31%  is ignoring all of the warning signs. “We are cautious on stocks. We would argue you want to be defensively positioned [and] we would argue that the U.S. equity market has run way, way ahead of growth,” says Chadha. The S&P, he notes, tends to be “very strongly correlated” with indicators of cyclical growth like the Institute for Supply Management survey (ISM), which fell into contraction territory last month. It suggests the index should be at 2,600, not at current levels just below 3,000, which appear to price in a “good solid rebound” for the ISM. Elsewhere, he says annual U.S. jobs growth slowed from 2.5% in the middle of last year to 1.3% last month, marking the weakest expansion in 10 years, and nearing “stall-speed” for the economy. “Every time payrolls growth has gone below 1%, the U.S. has ended up in recession. We would argue the U.S. economy is dangerously close to...tipping into recession,” he said, adding that the fate of the economy hinges on one thing - the trade war.

 The S&P 500 should be 13% lower because a recession is coming, warns Deutsche Bank - MarketWatch

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Onto our call of the day from Liz Ann Sonders, chief investment strategist at Charles Schwab, who warns investors are sleepwalking when it comes to one area of the global economy. “I think that there may be a bit too much complacency about inflation and interest rates staying low,” Sonders tells MarketWatch in an interview. “I’ve always had the view that we should be as least as intrigued by the story no one’s telling as by the story everyone is telling.” The Fed has a mandate to keep prices stable, which right now isn’t a problem, but should it become one, interest rate hikes come back into the spotlight. Financial markets and investors have grown pretty comfortable with the idea of central banks stimulating economies rather than slowing them down.

 Investors are too complacent about inflation and low interest rates, says Schwab strategist - MarketWatch

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Markets just shrugged off the biggest oil supply disruption in history and the worst funding squeeze since the crisis, but couldn't stomach an itinerary change by Chinese trade negotiators. On Friday afternoon, stocks swooned to their worst day in nearly a month on a headline a canceled visit to farms in Montana and Nebraska. That said a lot about the extent to which US trade policy is still the biggest issue for investors.

 We're All Caught In The Loop - S&P 500 Index (:SP500) | Seeking Alpha

“What really keeps me up at night is the data and the mood getting out of sync and, eventually, the possibility that the mood becomes the self-fulfilling prophecy of the data,” Daly told reporters on Monday at the Symposium on Asian Banking and Finance in Singapore. She warned that if “people are really uncertain, they fear a recession or they fear a downturn and this gets incorporated into their thinking and then they spend or invest less.” Subsequently, “less spending and investment creates a slowdown that we wouldn’t have otherwise had,” she said.

 SF Fed President Mary Daly on US economy, trade war, interest rates

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Kolanovic did say this some time ago, but it probably still holds:

“The U.S. economy is facing a quite unique situation in which one individual can disrupt global trade and investment plans of U.S. corporations, tax consumers on a broad range of imports, etc.,” says Kolanovic, we guess talking about President No. 45. “Given all of this — why are we not bearish on equities and the economy? Because this situation can also be undone on short notice and many market segments already price in worst-case outcomes,” writes Kolanovic, who uses mathematical models to price securities. He notes the recent threat of Mexico tariffs that came and went fast. He thinks a U.S.-China trade deal — logical going into an election year — could reverse about half of the market damage seen so far. “This would translate into a quick [approximately] 5% rally in broad markets, and a 10-20% rally in value and high beta. As a strong market and avoiding a recession would boost re-election odds, it would only be rational to expect this outcome,” he said.

 One big reason you should be in the stock market right now: J.P. Morgan - MarketWatch

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A new trade war?

Transatlantic trade ties face renewed disruption this week when global arbiters are expected to grant the United States a record award allowing it to hit European imports with billions of dollars of tariffs in a long-running aircraft subsidy dispute. The World Trade Organization (WTO) has found that both European planemaker Airbus and its U.S. rival Boeing received billions of dollars of illegal subsidies in a pair of cases that have run for 15 years.

 Record U.S. tariff award over Airbus aid could fuel trade tensions - Reuters

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One thing we know with certainty is that the trade war is contributing to the global manufacturing downturn, which has now boomeranged, making landfall stateside. One sure way to escalate the trade conflict would be for the Trump administration to move ahead with a plan to restrict capital flows to China, even if that plan is designed to limit the market fallout. Although it's entirely possible that President Trump's recent trials and tribulations inside the Beltway will compel the administration to strike a trade deal sooner rather than later in a bid to boost stocks and help buoy the economy, it's also possible that the unfolding impeachment drama could have the opposite effect. "Political pressure might increase the assertiveness of the President, which increases the risks of increased use of tariffs and unconventional tools to attain other policy goals (on currency, immigration etc.), and could bring a broadening and escalation of the trade wars," Barclays cautioned on Sunday. Fair warning, I suppose.

 Manufacturing Meltdown And A Reality Check From A CNBC Anchor | Seeking Alpha

The very weak manufacuring data in the US is starting to scare investors. Add to that the ideas to restrict capital flows to China and the new front in trade troubles:

The World Trade Organization was poised on Wednesday to open the door to hefty U.S. tariffs on European goods over illegal subsidies for Airbus, pushing a 15-year-old row over support for plane giants to the center of fraught global trade relations.

 WTO to back U.S. tariffs on Europe in clash over Airbus subsidies - Reuters

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It's tempting to go into the big business software platforms like AYX, TTD, TWLO, etc. as they have sold off big time, but keep this in mind:

Enterprise tech has been a hot area for investors in recent years, but the theme works only as long as corporate buyers are paying up for the technology. That’s no longer a sure thing. A wave of new data indicates that spending growth could weaken in the coming year. Blame worries about the global economy and the continuing trade war. Goldman Sachs’ September survey of technology sellers showed that demand trends from large corporations have “deteriorated markedly” across all industry verticals, compared with its June survey. 

 Enterprise Tech Stocks Face the Threat of Weaker Corporate Spending - Barron's