Last week, international markets rebounded after the previous week's coronavirus selloff. Asia and emerging markets were the big winners. Going forward, expect these markets to continue cautiously firming due to the following fundamental developments: supportive central banks, firming manufacturing data, and a calming of the trade tensions.
The RBA kept Australian rates on hold at .75%. Here is how the bank described the outlook for the Australian economy (emphasis added):
The central scenario is for the Australian economy to grow by around 2¾ percent this year and 3 percent next year, which would be a step up from the growth rates over the past two years. In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth. The household sector has been adjusting to a protracted period of slow wages growth and, last year, to a decline in housing prices, with the result that consumption has been quite weak. Following this period of balance-sheet adjustment, consumption growth is expected to pick up gradually. The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction.
Australia's GDP growth rate slowed in 2019, printing at an annual rate between 1.7%-1.8%. Unemployment has been steady between 5%-5.3% for the last 12 months. Retail sales growth slowed on a Y/Y basis through last summer, hitting 2.4% in June; they have since been rising and are now 2.9%. Manufacturing has been contracting for the last three months. Services contracted in the latest monthly reading.
The Reserve Bank of India voted to keep rates unchanged (policy repo rate is 5.15%; bank rate is 5.4%). Here are some key statements from their policy release (emphasis added):
Over the last three days, i.e., during 4th, 5th and 6th February 2020 the Monetary Policy Committee (MPC) met and assessed current and evolving macroeconomic and financial conditions and the outlook. After extensive and drill-down review and discussions, the MPC voted unanimously to keep the policy rate unchanged. It also decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
Turning to the Indian economy, the first advance estimates (FAE) released by the National Statistical Office (NSO) on January 7, 2020 placed India’s real gross domestic product (GDP) growth for 2019-20 at 5.0 percent. In terms of high frequency indicators, both production and imports of capital goods – two key pointers of investment activity – continued to contract in November and December. Government expenditure, especially of the Centre, is providing counter-cyclical support to domestic demand.
The manufacturing sector faced weak demand conditions in Q3:2019-20, though business sentiment is improving. This is corroborated by the manufacturing purchasing managers’ index (PMI) which picked up sharply in January 2020 on the back of increased output and new orders. In the services sector, several high frequency indicators have turned upwards in the recent period, such as tractor sales (representing rural demand), domestic air passenger traffic (an indicator of urban demand), three-wheeler sales, railway freight and port traffic. The PMI services index also improved sharply in January 2020, boosted by a rise in new business and output. On the other hand, passenger vehicle sales contracted in December.
India is in the middle of a growth slowdown; the annual rate of GDP growth dropped from 8% to 4.5% over the last six quarters. Unemployment has fluctuated between 6.7% and 8.2% during the last twelve months. Manufacturing sentiment has been positive during the last 12 months; service sentiment dipped into contraction five times but is currently in an upswing.
Several international organizations have noted that slow Indian growth is dragging down global growth projections in 2020.
The Central Bank of Brazil lowered rates to 4.25%. This central bank is focused exclusively on inflation, which explains why its policy statement is focused on that economic statistic:
The Committee judges that various measures of underlying inflation are running at levels compatible with meeting the inflation target at the relevant horizon for monetary policy;
Inflation expectations for 2020, 2021, and 2022 collected by the Focus survey are around 3.4%, 3.75%, and 3.5%, respectively;
The Copom's inflation projections in the hybrid scenario with interest rate path extracted from the Focus survey and constant exchange rate at R$4.25/US$* stand around 3.5% for 2020, and 3.7% for 2021. This scenario assumes a path for the Selic rate that ends 2020 at 4.25% p.a. and rises to 6.00% p.a. in 2021; and
The scenario with constant interest rate at 4.50% p.a. and constant exchange rate at R$4.25/US$* yields inflation projections around 3.5% for 2020, and 3.8% for 2021.
Brazil's annual GDP growth has slowed; it has printed between .6% and 2.4% during the last three years. Unemployment has dropped from 12.7% at the beginning of 2019 to 11%, which has supported retail sales growth. Manufacturing and service sentiment has been mostly positive over the last year.
The Bank of Russia lowered rates 25 basis points to 6%. Here is how they described the Russian economy (emphasis added):
In Q4, economic activity indicators mainly continued to improve. At end—2019, investment activity was supported by an accelerated increase in capital budget expenditure, including owing to the implementation of national projects. Annual retail trade turnover and industrial production continued to grow. However, leading indicators point to a still weak business sentiment in industrial sector, which is mostly specific of export orders. Economic activity continues to be constrained by weakening external demand for Russian exports on the back of a global economic slowdown.
The labour market creates no additional inflationary pressure. The fact that unemployment remains near historic lows is not driven by expanding labour demand but rather by a simultaneously contracting number of employees and the labour force.
Russia's annual GDP growth rate has picked-up, rising from .5% to 1.7% between 1Q19 and 3Q19. Unemployment is low at 4.6%, which has supported a fairly consistent Y/Y percentage change in retail sales. Like many countries, business sentiment is split: manufacturing is contracting while services are expanding.
Let's look at this week's performance table for the major international equity ETFs:
This week, global markets rebounded from last week's Coronavirus selloff. China gained 3.75%, making up some of its big, post-New Year's holiday selloff. The rest of Asia followed suit. Emerging markets also made-up some lost ground. Russia was unchanged while India sold off modestly.
Let's take a look at the two-month charts.
There aren't many strong rallies. The SPDR S&P 500 (SPY) (lower right) has the best chart; Japan (middle, second from right) has rebounded and is at levels from earlier in the years. A majority are consolidating losses after a modest or large selloff.
As I noted above, expect these markets to continue firming as the economic backdrop slowly improves. The most important development is the thawing of US-China trade tensions. The two parties have already signed a Phase I deal and there is further negotiation occurring. This is helping to help global manufacturing stabilize, which is, at minimum, preventing further deterioration.
