Tug of War Continues

Tug of War Continues

Equities 4 minutes to read

Summary:  Worries about global growth and the slowdown in manufacturing in the spotlight


Asian stocks edged higher today, but it was a muted day of trade following a lacklustre session on Wall Street overnight.

There is an ongoing tug of war in equity markets between optimism on trade and monetary easing which soothes sentiment, but this is offset by persistent confirmation of the ongoing deterioration in global growth which curbs enthusiasm regarding the aforementioned. 

Worries about global growth and the slowdown in manufacturing were in the spotlight overnight as weak German and French PMI numbers soured sentiment and all but confirmed Germany is likely already in recession. Germanys manufacturing PMI contracted at the fastest pace in a decade under the weight of the trade war and global manufacturing recession. And services also declined as the slowdown begins to deepen.

▪ Flash Germany PMI Composite Output Index (1) at 49.1 (Aug: 51.7). 83-month low.

▪ Flash Germany Services PMI Activity Index(2) at 52.5 (Aug: 54.8). 9-month low.

▪ Flash Germany Manufacturing PMI(3) at 41.4 (Aug: 43.5). 123-month low.

▪ Flash Germany Manufacturing Output Index(4) at 42.7 (Aug: 45.8). 86-month low.

Services not Immune

The US services PMI also came in at the lowest on a quarterly basis since Q1 2016. This is of concern as it sparks fears of contagion from the manufacturing led slowdown into the services sector which would have a greater drag on economic growth. The problem is that the manufacturing sector typically leads the services sector lower, which represents a larger part of the economy and is where the bulk of employment sits, so heightens the impact on consumption and raises recession risk. To date recessionary dynamics in the manufacturing sector have not yet bled into the services sector more broadly, with the impact being limited to trade sensitive services as we have highlighted back in July. But with the ongoing deterioration in services PMIs illustrated by the French, German and US data overnight it appears the risks are increasing, which would deepen the slowdown already under way. This nascent spill over into the services sector puts the so far resilient consumer, currently underpinning the economic expansion, at risk because services is where a larger part of the workforce sits. Labour markets have been a pillar strength alongside the current global slowdown, but leading indicators have been deteriorating and now coupled with evidence the services sector may be slowing this pillar could be set to crumble which would accelerate the end of cycle dynamics currently in play. If the ongoing industrial recession continues to seep into the services sector more hawkish members of the FOMC will be forced to capitulate before year end.

Gold miners were among the top performers today in Asia after gold jumped the most in almost 3 weeks off the back of the weak PMI data. After a few weeks of consolidation, gold will continue to climb in coming months whilst expectations for global growth are continually recalibrated downwards, uncertainty is elevated and geopolitical frictions remain. The backup in yields that we have seen since the start of this month will also likely prove to be a buying opportunity. This as the synchronised global slowdown continues, US/China tensions are merely on ice and central banks continue their spate of policy easing. As growth continues to slow neutral rates will also decline which will force central banks hand on continued and more aggressive monetary easing.

RBA

The August jobs report on top of September’s dovish minutes sealed the deal for the RBA to cut the official cash rate again in October from the current record low of 1.00% to 0.75% as we have previously thought. But traders will be listening to RBA Governor Lowe’s speech tonight for clues on where the RBA is at in relation to next week’s policy decision. Market bets of a rate cut next week have stepped up following the pickup in unemployment and underemployment last week which is a serious impediment to spurring wage gains. This pick up in labour market slack along with deteriorating business conditions and the minutes of the September meeting which were decidedly dovish should have sealed the deal for an October cut particularly given it is clear the government will look to maintain the budget surplus as a priority leaving the heavy lifting to the RBA. A rate cut next week, and further monetary easing will continue to keep downwards pressure on the AUD, along with mounting global growth concerns and a strong US dollar. Given the probability of a cut at next week’s meeting is sitting at around 75% any dovish comments from Lowe tonight should see a pickup in market pricing which means there is room for the aussie dollar to trade lower.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992