Asian and European equities fell on Friday after weaker-than-expected Chinese data revived fears about China’s slowing economy. In November Chinese retail sales grew at their slowest pace since 2003, and industrial production grew by a weaker-than-expected 5.4%, overshadowing a further stabilization in fixed asset investment growth. Eurozone composite PMI data also came in lower than anticipated at 51.3. The Hang Seng index closed down 1.6%, and in morning trade the Euro Stoxx 50 index was down 1.0%.
But we see a number of more positive developments that should help lift market sentiment:
- As China’s economic growth cools, Beijing has signaled it intends to step in to smooth the path forward. On 13 December, People’s Bank of China Governor Yi Gang promised “relatively loose monetary conditions” to address what he called a downward economic cycle. We expect further RRR cuts over the next six to 12 months. Trade policy remains another lever, and a weakening economy could incentivize China to compromise on some disputed issues.
- In fact, developments on trade have been largely positive this week. China has resumed buying US soybeans for the first time since trade tensions started heating up in July, a move welcomed by US officials as a "great step." Reports also suggested China may be willing to cut tariffs on US auto imports and reformulate its "Made in China 2025" plan – which was seen as hostile to US interests by the Trump administration. On the US side, President Donald Trump indicated he may be willing to intervene in the legal case against a Huawei executive to facilitate trade discussions.
- Ahead of their December meeting, Federal Reserve officials have underlined their determination not to damage the economy through overly aggressive rate rises. As Fed Chair Jerome Powell mused, when “you’re walking through a room full of furniture and the lights go off, what do you do?’ You slow down.” The market has gone from pricing 60bps of tightening for 2019 as recently as October to just 11bps. We expect two rate hikes in 2019, down from our previous forecast of three.Overall, we think that global equities are more likely to rise than fall over the next six months, and we remain overweight. We continue to monitor risks such as China’s slowdown and the US-China trade dispute and hold downside hedges to protect against more adverse scenarios.
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