Summary: Delivering a blow to those still waiting for the 2H recovery, data released today showed South Korean exports heading toward their lowest level since the financial crisis of 2008. This could be a harbinger of pain ahead in Asian trade data and the SOX index which is hovering around all time highs.
South Korean exports of information and communication technology products have been falling for 10 straight months and it looks like September will be added to that streak.
South Korea’s trade data is released before other global trade data so is a good indicator of more negativity across Asian export data to unfold throughout September, as the lagged effect of September’s tariff hikes takes effect and the global economy has continued to slow, buffeted by cyclical headwinds and a fragile geopolitical backdrop.
But more worryingly South Korean data is typically a good lead on the global economy and global demand given that its industries are heavily integrated within the global supply chain and highly cyclical. It is for this reason that South Korean data is often used in global macro leading indicator models and expectations of future earnings growth and world trade growth, so this latest round of ugly trade data tempers any optimistic notion of a recovery in tech demand and global demand being around the corner. So, this data spells more trouble ahead.
For the first 20 days of September:
South Korea is distinctly vulnerable as the trade war, China slowdown, downturn in the electronic cycle and dispute with Japan weigh on economic activity along with the broad-based slowdown visible across the whole of Asia. But also, South Korea is heavily reliant on USD funding in a world where dollar liquidity is tight which only exacerbates the other issues, meaning South Korean GDP growth will remain hampered and the KRW pressured.
The prolonged weakness in chip demand and cyclical downturn in electronics, evidenced by exports of Semiconductors continuing to fall sliding 40% Y/Y for the first 20 days of September, is a stark divergence with the Philadelphia Stock Exchange Semiconductor Index (SOX) hovering around all-time highs. Particularly once you factor in the continued pressure on DRAM prices from July this year. Many companies in the market have been stockpiling inventory and holding off production cuts in the hope that this current slowdown is temporary, but this data doesn’t back that up and in that respect, it looks like the SOX index is hardly reflecting reality.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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