AFTER A brutal sell-off in December, stock markets around the world have staged an impressive rebound since the turn of the year.
The US S&P500 gained 8 per cent in January, the best January gain in more than 30 years.
Propping up the market is the relentless flow of good news such as a dovish signal from the US central bank that it will be “patient” in raising interest rates, the progress in US-China trade negotiations that fuel hopes of reaching a trade deal before the March deadline, and the rapid 20 per cent rebound in oil prices this year.
Gauging from the recent price action in stocks, bonds and exchange rates, the financial markets appear to be pricing in the most optimistic outcomes. The heightened optimism leaves little room for a positive surprise.
As far as the Fed’s dovishness goes, the futures market is pricing no further rate hikes in 2019. Bond traders even envisage a rate cut in 2020. Expectation of an ECB lift-off is also being put off well into 2020.
The US-China trade agreement also appears to be fully-priced in as the Yuan strengthened to hit 6.7 per dollar, the level last seen in July 2018 when the US proposed a 10 per cent tariff on $200-billion (Bt2.26-trillion) worth of Chinese goods. The actual outcome is far from certain as differences remain on several key issues, including the Chinese government subsidy in hi-tech industries. The development in the legal case against Huawei could also further complicate the negotiation. High hopes aside, recent macro readings are painting a bleak picture for the global economic outlook. The Purchasing Managers’ Index (PMI) suggests China’s manufacturing sector has plunged into contraction. PMIs in Japan and Europe showed that growth has ground to a halt in January. Export numbers were also flashing red with China, Japan, Thailand and Korea seeing negative export growth in December.
With expectations running high, the stock market may be setting itself up for big disappointment. Given the soft economic data, the stock market rally is more likely to soon run its course rather than to carry on.
Contributed by KOMSORN PRAKOBPHOL, head of TISCO Economic Strategy Unit (ESU).