Tumbling China anvil lands on Australian dollar

DXY was weak last night. EUR is struggling. The source of global alarm, China, is seeing a rising currency for no apparent reason:

The Australian dollar was thumped versus DMs:

But not so much as EMs:

Gold keeps rallying on Fed hopes:

Oil appears to be rolling:

Base metals remain unimpressive:

Big miners are better ex-Vale:

EM stocks are threatening to break out of a double bottom pattern:

Likewise junk:

Treasuries were bid:

The bund curve keeps flattening:

Stocks took it on the chin:

News of evening was dominated by a couple of China-related profit warnings. Caterpillar and Nvidia blamed China, Yahoo:

U.S. stocks slumped on Monday, as warnings from Caterpillar Inc (CAT.N) and Nvidia Corp (NVDA.O) added to concerns about a slowing Chinese economy and tariffs taking a toll on corporate profits.

Shares of Caterpillar, the world’s largest heavy equipment maker, fell 9.3 percent after its quarterly profit widely missed Wall Street estimates, hit by softening demand in China and higher manufacturing and freight costs.

Nvidia tumbled 13.8 percent after the chipmaker cut its fourth-quarter revenue estimate by half a billion dollars on weak demand for its gaming chips in China and lower-than-expected data centre sales.

“Every time we get earnings stating China as a problem, investors start to realize that issues with China are going to spread and without China growing at a good clip it will be hard for the global economy and the U.S. to continue an expansion,” said Ryan Nauman, market strategist at Informa Financial Intelligence in Zephyr Cove, Nevada.

Capital Economics asks if the global slowdown is more serious than thought:

Annual gatherings, like those in Davos last week, tend to produce little in the way of meaningful policy shifts, but they can be a useful way of gauging the mood about the global economy. This year it was decidedly gloomy. The IMF grabbed the headlines by pulling down its forecast for global GDP growth in 2019 from 3.7% to – wait for it – 3.5%. As it happens, our forecasts are more bearish – we expect the world economy to grow by 3.0% this year and just 2.8% in 2020. The latter would be the slowest pace of expansion since the global financial crisis.

This slowdown has started to show up in the economic data, including another batch of weaker trade figures from Asia last week and sharp falls in the business surveys in Europe. The simple explanation for all of this is that country-specific factors are causing growth to slow in each of the world’s major economic regions.

In China, the lagged effect of earlier policy tightening is still pulling down credit growth, which in turn is weighing on activity in the real economy. In Europe, problems in Italy have been compounded by disruption to vehicle production caused by new emissions tests, and a rise in inflation that has dragged on real incomes.

The data from the US have held up for now, but we expect the economy to slow further over the course of 2019 as the sugar-high from last year’s fiscal stimulus wears off and the lagged effects of monetary tightening start to bite.

Taken together, these three regions account for just over half of global GDP. Given their size, weaker growth will inevitably weigh on the rest of the world – hence our view that we’re in the early stages of a global downturn.

The downturn in our forecast is more severe than that envisaged by the IMF and others, but relatively mild by past standards (particularly 2008-09). The real question, in my view, is therefore whether we’re missing something more serious. After all, the extent of the deterioration in the latest data has surprised even us. On some measures, industrial production in the euro-zone is now deteriorating at its fastest pace since 2009. What’s more, the global economy has been underpinned by increasingly shaky foundations. Debt levels are high, monetary policy in this cycle has been unusually accommodative, asset prices everywhere look stretched and global trade imbalances continue to linger in the background. None of this feels particularly sustainable, so it wouldn’t be a big surprise if it all came crashing down.

So what might we all be missing? Four things stand out. First, we may be underestimating the fallout from global “trade wars”. As we’ve argued before, it would require a significant escalation in trade protection to have a substantial direct impact on world trade volumes and thus global growth. But it’s possible that we may have underestimated the indirect effects of the trade war. Business investment in several countries has been unusually weak given the current point in the cycle, which may reflect skittishness about trade wars. And there is some evidence that the recent weakness in trade in Asia may have been caused by manufacturers of consumer electronics running down their inventories in anticipation of weaker demand resulting from higher tariffs. This should unwind if the US and China manage to agree a trade truce, but it may nonetheless help to explain the weakness of the recent data.

The second – and more ominous – thing we may be missing is that financial strains could be building in the world economy. There is nothing in the broad money or bank lending data to suggest that trouble is lurking around the corner. But financial conditions have tightened considerably in the world’s major advanced economies over the past six months, which has previously been a canary in the coal mine. Given the backdrop of high debt levels and stretched asset prices, it’s not difficult to see how this could develop into something more serious.

Third, it’s possible that we may be underestimating the extent of the slowdown in China. We track shifts in the economy using our China Activity Proxy, which we believe provides a more reliable measure of growth than the official data. But given the size and complexity of the economy, and the degree of structural change experienced over the past few years, it’s possible that we might be missing something. Of all the Chinese data, the trade figures are arguably the most reliable – and the fact that they have been particularly weak is an ominous sign.

Finally, it may be that we’re not missing anything at all, but the fact that the global economy is now more inter-connected means that feedback loops are amplifying the effects of slowing growth in each of the world’s major regions. These may have boosted growth in 2017, when the world experienced a synchronised upswing. But we may now be experiencing this in reverse.

Of course, it’s also possible that these concerns simply blow over and the global economy finds its feet once again. Some of the weakness in the euro-zone is undoubtedly due to temporary disruption in the auto industry, and lower oil prices are likely to pull down inflation this year which may give a boost to consumers. Likewise, a trade truce would remove one of the recent headwinds to growth and provide a shot in the arm for global equity markets. But ten years into the world recovery the risks probably lie on the downside – and it feels like this is where investors should be focusing their attention over the coming months.

Quite right. My view is we’re headed towards closer to 2% global growth in H2, 2019, led lower by fading Chinese growth, the US fiscal cliff and a European recession.

Yet, markets still have Trump Derangement Syndrome and are focused on every tick in US politics and the Fed rather than the overall picture. Friday saw the Fed leak that it is mulling easing up on quantitative tightening, at WSJ:

Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight.

Officials are still resolving details of their strategy and how to communicate it to the public, according to their recent public comments and interviews. With interest rate increases on hold for now, planning for the bond portfolio could take center stage at a two-day…

The ECB is still dawdling as recession tightens its grip on the Continent. The PMIs are one way train wreck:

Led by collapsing external demand:

With investment to follow:

Mario Draghi is slowly warming up, also at WSJ:

The European Central Bank is ready to use all its policy tools to support Europe’s softening economy, including by restarting a recently shelved bond-buying program, ECB President Mario Draghi said.

The comments, delivered to European lawmakers in Brussels, underscore a new tone of caution from the ECB, which moved only last month to phase out its landmark stimulus policy, a €2.5 trillion ($2.9 trillion) bond-buying program known as quantitative easing or QE.

China has not done enough either to turn around growth and it will need to cut the cash rate to do it. In other words both the ECB and PBOC are going to have to trash their currencies.

For the time being, markets are obsessing over the US but it remains in decent shape post-shutdown. The Fed has been bashed into easing up by the White House but both China and Europe are going to have to ease much more aggressively if they’re going to turn growth.

Ironically, such will prevent the USD from falling which in turn will keep global liquidity tight until or unless US growth also falls over.

This will add ongoing downwards pressure to commodities and the AUD.


  1. St JacquesMEMBER

    This is turning out to be a great year. It was only in the latter half of last year I started to really believe the great bust could no longer be put off by govt/RBA dodges and scams/ I’m going to sooooo enjoy watching the panic stricken foreign specufestor scum trying to rip their ill gotten loot out of their Ozzie bolt holes, and the AGONY this is going to cause for our own herds of locally bred specufestor and bankster scum. Meanwhile all the mainstream media are in turbo overdrive trying to convince us all is good with our bubble ekonomie;,even Ross Gittens – did anybody see his pathetic high school level effort in the weekend rags? What a laugh. Burn you greedy bastards, BURN ! HAHAHAHAHAHAHA

    • Hmm. There is still that pesky view that the AUD is “as good a place as any” to stash money in the event of global weakness “because China will always stimulate eventually”.

      • Should be ‘Because China, ECB, BoE, FED BOJ, will ALL stimulate in the end and Aus looks like a good place’. Our little economy is a tiny cork on this ocean and it will get washed wherever the big waves push it.
        The housing market bust and smashed A$ is still not a one-way bet. As long as we run with the stunningly moronic economic meme that we have operated in for the last 40 to 60 years the interests of this country and its people run a very poor last to the interests of the rest of the world.
        BTW The click-bait headlines are tiresome. What’s written in the article is pretty good and totally at odds with the headline.

      • China will stimulate periodically, for sure, circling the plug-hole as they are. However, there is both empirical evidence (as well as sound theory) that says the impact of each round of stimulus decreases (the law of diminishing returns). Added to which, each round of stimulus simply brings China closer to economic catastrophe as their debt pile is increasingly unserviceable and their currency increasingly worthless. All looks fine now, but one day they’ll arrive at an inflection point and it’ll be the end for them.

      • Dominic
        Totally agree with the results to the next round of stimulus. My thinking, however, is around that we can’t even begin to imagine the level of it that these idiots are going to do. They have no alternative now. I’m not sure who first came up with the quote (Taleb?) ‘We’ll either end up with nobody having any money or everyone will have plenty of money that won’t buy anything’

        Say the ECB start printing a few Trillion, the FED prints a few trillion, the rest chime in, then Australia’s CAD and debt are not going to look like much of a concern. From memory, when the ECB printed last time about 40% of the funds printed left the EU. The US sprays money all over the world all the time. The MMT clowns are right. We can print all the money we need !! Bwahahahaaa!!!!
        Just thinikin!

    • The problem is that no one can begin to imagine that life could be materially different from the one they’ve experienced over the past 30 or 40yrs and the life they see waking up this morning. Sure, there might be economic ‘soft patches’ from time to time but otherwise things will just continue as they have been in recent memory. It is ingrained the psyche that house prices will always go up and that future generations will be wealthier than past ones.

      Sadly the warning signs are beginning to spring up with increasing regularity that this may not be the case. This quote, from one of the world’s most respected investors, sums things up nicely:

      “It is not hard to imagine worsening social unrest among a generation that is falling behind economically and feels betrayed by a massive national debt that was incurred without any obvious benefit to them.” – Seth Klarman

      • Yup!!! My train of thought has always been – major economic dislocation followed closely by social dislocation and major civil disturbance. Dictators and wars follow.

      • “Dictators and wars follow.” – that is how I see it. We already have them (dictators) and in some countries where people think they are free to chose. Some countries will not try to mask it and some already are masking it where population can only chose one of two while both candidates, behind the curtain, report to the same machine.

      • ‘report to the same machine’
        My tinfoil hat tells me exactly that. My evidence, oten quoted sorry, is Barnaby and Bowen each having a crack at foreign debt at one stage. Virtually overnight (in Barnaby’s case it happened overnight I can attest) they each went absolutely silent on the issue and it has never been raised again by either of them.

  2. Will be very interesting to see how Friday’s 3.75% 2037 bond tender goes…….only $400 million on offer all week.

  3. So if the Fed and ECB start buying bonds again, how will that impact stock and asset markets? Will we get a return to normal? 2015 / 2017 price rises or with it just stem the bleeding?

    • Given that QE as tool to ‘fix the economy’ has been an abject failure its only real use can be to goose asset prices. Printing money may push the indexes up but it’s the value of the currency in which your assets are denominated that counts.

      As Venezuela entered its hyper-inflationary phase in recent years the Caracas Stock Market was the best performing on the planet (by a country mile). That, in a nutshell, is what you need to know. As Kyle Bass might opine: your nominal returns are measured in 1000s of percent but your entire portfolio would buy you three eggs.

  4. All the major central banks will ease, including the Fed.
    Europe might be obviously stuffed, but the US economy is weakening as well.
    It will make life easier for everyone if the Fed starts monetary easing first.
    QT will end sometime in 2019, and the next move is a rate cut.

  5. Just sold all my physical gold.. Perth Mint was charging me too much storage fees. Hope price will drop again so I can buy some from Perth Mint authorised dealer in Syd and store it privately. I do want to have some physical as back up for just in case. Made decent profit, more than keeping the cash with ING. Though I do plan to move half the money back with ING.

      • wasn’t cheap either. Now, I just hope gold does not spike to the roof while I have none. I have some cash to start buying dips if there are any.. as AUD may start falling too.

      • Depends on where you live. It’s nuts that the only ‘Mint’ is in Perth. From Brisbane, flying over and back costs $800 or more even on a one day return. Delivery charges are ridiculous. WSo you need to be buying a fair whack to make it worthwhile. Then you have to find a way of storing it where nobody can find it.

      • Perth Mint has authorised dealers that I hope will not sell sh1te but mate unless you can drill and test the actual item.. Another option is if you happen to fly to Perth you can arrange pick up from Perth Mint.

      • goldstackers.com.au, or perthbullion.com.au (not the perth mint) and look up XRF testing. you don’t drill your precious metals…
        buy less than $5k at a time or KYC kicks in.

      • there are also the forums at silverstackers.com.au but you’re faced with paying up front and no XRF / assurances. but you can usually buy cheaper than from a dealer..

      • You can buy from perthmint and store it allocated there for you in its own little hidey hole for 1% PA.
        AU$ gold has been increasing 7% PA for over 10 years.

    • Buy bullion from a dealer in the CBD and stick in your safe at home ? Or get a deposit box at a bank ?

    • Nickola – Why would you want to own physical gold at this stage – banking and financial systems are still working.
      Why wouldn’t you just hold a US ETF such as GLD?

      • AI answered it. Now plan is to buy 20 Oz of gold and stash it somewhere save. This would be my survival kit.

      • Graham- US tax on gold and physical gold ETFs is quite heavy compared to their tax on other capital gains.


      • if you’re buying as a cash replacement you may want to consider fractional purchases and some silver + fractional. it’ll be a challenge to get change out of a $2000 coin.

    • I topped up last week, so rather pleased. my best metal has been iridium, bought it when at $700 USD/oz. only a few oz though.
      waiting for that silver moonshot.