When Trump unexpectedly won the election, and futures staged one of their most dramatic rebounds in history, surging from limit down to solidly in the green, Wall Street promptly goalseeked their economic assumptions “chasing the price”, quickly going from bearish to bullish, and nobody did it faster or more conclusively than Deutsche Bank, which seemingly overnight flipped from one of the biggest bearers of gloom on the outlook for the US economy, to one of its biggest cheerleaders.
That however changed overnight, when DB’s European equity strategist Sebastian Raedler highlighted that, according to the latest flash PMIs, global growth momentum hit a six-year high in January.
And with global macro surprises close to their all-time high – much of which has been predicated on the relentless debt-creation by China which just got instruction to slow down dramatically in the current quarter – the DB strategist says they are likely to roll over from current elevated levels, resulting in a slowdown in global growth in the coming months.
From his full set of observations, first here are the good news:
Global growth momentum hits a six-year high: in mid-January, our indicator of global macro surprises rose to 45, the highest level since May 2010. This points to a further rise in global manufacturing PMI new orders from the December level of 53.7, implying they are now at a six-year high and consistent with 2017 global GDP growth of 3.5% at market FX terms (a sharp acceleration from the 2.6% realized growth over the past four quarters).
The rebound in growth momentum has been the main driver of the sharp moves in asset prices over the past six months:
- Global equities have continued to track global macro surprises over the past year (with an R2 of 70%), rebounding by 15% on the back of the 50 point rise in macro surprises since mid-2016;
- US 10-year bond yields have moved in line with global PMIs since the end of the financial crisis in 2009 (with an R2 of 75%): after the Brexit vote in June 2016, they had undershot this relationship (pricing in a sharply negative growth shock), but then rebounded by 100bps to re-couple with improving growth momentum (though, at 2.5%, they are still slightly below the fair-value level suggested by that relationship, at 2.8%, potentially because of the technical obstacle of extreme short positioning).
- European cyclicals versus defensives have rebounded by 25% since early July to reach a 10-year high, the sharpest cyclical rally since 2009, in line with rebounding macro surprises.
And now the bad:
We believe global macro momentum is likely to roll over from current elevated levels:
- Global macro surprises have only been higher 5% of the time since 2003 (when the data series starts), typically roll over from these elevated levels and have shown first signs of softening over the past week;
- Global PMIs are already consistent with global GDP growth 50bps above our economists’ 2017 growth forecasts of 3%, despite the fact that the latter incorporate aggressive assumptions for fiscal stimulus in the US;
- Chinese PMIs are already close to a six-year high, having rebounded by 7 points over the past 15 months. They point to quarterly annualized GDP growth of 8%+ (above the government’s target of 6.5%) and the credit impulse (a key driver of SoE fixed asset investment) is set to turn negative. This suggests the risk to Chinese growth momentum is now to the downside;
- Our model of global PMIs suggests global growth momentum has rebounded because of the easing in financial conditions due to tighter HY spreads and a reduced drag from USD strength as well as lower global uncertainty. However, it also implies that the rebound in growth momentum should start to fade, as the lagged benefit from falling commodity prices is wearing off.
Not surprisingly, it will all start with the world’s “marginal” growth economy China:
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So if DB is right and the global economy is about to roll over, just as Trump begins his presidency, how should one trade it? Simple: by derisking, i.e. selling stocks.
Trade recommendations: Lower macro surprises would be consistent with a tactical pull-back for equities (especially against the backdrop of still-elevated readings on our market sentiment indicators) as well as a roll-over in cyclicals versus defensives.
DB’s conclusion: “the equity market looks stretched“, and furthermore the bank’s proprietary exuberance indicator has continued rising above a level of 70: “in 7 out of 8 instances over the past 10 years, the market has fallen over the following month (by up to 10%, but 2% on average).”
Finally, there is no more “cash on the sidelines” – cash holdings for US mutual funds are close to a 5-year low, suggesting that little money remains on the sideline waiting to come into the market.
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