(Bloomberg Opinion) -- U.S. stocks underperformed their global counterparts for the second consecutive day Monday, with the MSCI USA Index falling 0.69% as the MSCI All-Country World Index excluding the U.S. dropped just 0.34%. It’s been more than a month since U.S. equities lagged behind their global peers on consecutive days. Perhaps it’s just a reflection of investors deciding it’s a good time to cull some gains with U.S. stocks among the best performers this year, especially on a currency-adjusted basis. If so, that appears to be the smart move.
The escalating trade war between the U.S. and China has taken a turn for the worse, and nobody is really sure how much damage it will do to profits. Most estimates have earnings turning higher in the fourth quarter, but that was predicated on an agreement coming soon between U.S. and Chinese negotiators. Now, nothing is likely to reverse until at least the Group of 20 summit in late June, where President Donald Trump said he plans to meet President Xi Jinping of China to talk trade. Corporate executives are on edge. Nike Inc., Adidas AG and 171 other footwear companies urged Trump in an open letter Monday to reconsider his tariffs on shoes made in China, saying the policy would be “catastrophic for our consumers, our companies and the American economy as a whole.” More broadly, there are signs that manufacturing is hurting. While not a top-tier economic data point, the Federal Reserve Bank of Chicago’s National Activity Index released on Monday is a useful indicator because it tracks the action in America’s industrial heartland. That gauge registered a negative reading in April for the third time in four months, according to Bloomberg News’s Alex Tanzi and Vincent Del Giudice. The data go hand-in-hand with other statistics pointing to sluggishness in retail sales, auto sales and manufacturing.
Even so, it’s not as if a recession is imminent. A monthly survey by Bloomberg News conducted from May 3 to May 8 shows that economists have pushed back their timing for the start of the next recession to 2021 from 2020. Economists also boosted their forecast for economic growth this year, to 2.6% from the 2.4% estimated in April’s survey. But those surveys were conducted before the U.S.-China trade talks fell apart on May 10. “Let’s be really clear on these trade talks: These are going to go on for months, quarters, years, maybe even decades,” Gibson Smith, chief investment officer at Smith Capital Investors, told Bloomberg News. “You don’t take 20 years of fairly free trade and try to reverse it or change it overnight.”
MARKETS REALLY LIKE MODIHow happy were investors to hear that exit polls showed Prime Minister Narendra Modi’s ruling coalition is poised for victory in India’s general elections? Consider that India’s stocks and currency were the world’s biggest gainers relative to their recent moves on Monday, and the country’s bonds were at the top of the list in the sovereign debt market for most of the day. Clearly, investors are overjoyed that Modi will get another five years running the world’s fastest-growing major economy. For Modi, victory would allow him to push forward an agenda that includes a boost in infrastructure spending, support for farmers and measures that appeal to Hindu nationalists, according to Bloomberg News’s Iain Marlow and Bibhudatta Pradhan. “The markets should see continuity and potential for reforms, and foreigners are likely to be net buyers,” Jean-Charles Sambor, deputy head of emerging-market debt at BNP Paribas Asset Management, told Bloomberg News. “We see India as being under-owned.” The International Monetary Fund forecast in April that India’s economic growth will accelerate to 7.3% this year from 7.1% in 2018, a rare upgrade when the IMF downgraded its global growth estimate to 3.3% for this year from 3.6% in 2018. The implications go beyond India. As the “I” in the BRIC acronym that also includes Brazil, Russia and China, any strength in Indian markets has the high potential to lift emerging-market assets globally. That would be welcome, with the MSCI EM Index of equities down 8% in May and heading toward its worst monthly performance in years.
BRAZIL DOWNGRADES BECOME AN EPIDEMICOr maybe not. As good a moment as India is having, Brazil is having one that is equally bad. The country’s currency on Monday depreciated for the seventh time in the past eight days to its weakest level since September. The latest weakness comes as economists cut their forecast for Brazil’s growth in 2019 and now expect a third year of meager economic recovery following the country’s deepest-ever recession. Latin America’s largest economy will expand 1.24% this year, according Bloomberg News’s David Biller, citing the median forecast from economists surveyed by the central bank, down from their 1.45% call last week and half of what they expected three months ago. It is the 12th consecutive week estimates were reduced. Brazil’s economy grew 1.1% in both 2017 and 2018. As Biller notes, investors and analysts brimmed with optimism after President Jair Bolsonaro’s election last year, expecting measures to liberalize the economy and a surge in investment that would boost growth. Instead, there’s been slow progress winning over lawmakers to secure passage of a key pension reform, which has kept investors in wait-and-see mode. Unemployment is stubbornly in the double digits, crimping consumption despite record-low interest rates. Brazil’s real has slumped 5.59% this year, while the MSCI EM Currency Index is effectively unchanged. As for the benchmark Ibovespa index of stocks, it’s up 4.25% in local terms but down 1.40% in dollar terms, diminishing its appeal for international investors. Investors pulled $184.9 million from Brazil-focused ETFs last week, according to data compiled by Bloomberg, second only to the $194 million yanked from those focused on Mexico.
THE LINE IN THE YUAN SANDThe yuan’s march toward the psychologically important 7 per dollar level took a break on Monday, but that didn’t stop the speculation of what the fallout might be if and when it finally weakens to that point. BNY Mellon is one firm that thinks the Chinese authorities will step in and prevent the yuan from depreciating to 7 per dollar (it was at 6.9179 on Friday, its weakest since November) and potentially sparking a capital flight that might throw global markets into disarray. “Beijing has a history since the summer of 1998 of stepping in to minimize currency market volatility when there is a concern it could feed through into broader asset market turbulence,” Simon Derrick, the chief currency strategist at BNY Mellon, wrote in a research note Monday. “Given the authorities held the line” in the fourth quarter, “it seems reasonable to assume they are concerned that a rapid move beyond this level might lead to heightened volatility in a range of markets and that this is worth defending against,” Derrick added. It may be too late. Bianco Research noted that evidence is mounting that the trade war has intensified the rate at which money is leaving the country. The firm points to the big difference between the yuan’s onshore and offshore rates. At a recent 65 basis points, the gap is the widest since January 2018 and the second largest since China devalued the yuan in 2015. “This divergence can be viewed as a sign of increased capital flight out of China,” the firm noted. “Yuan traders outside China are willing to accept a lower offshore rate in order to keep their money outside the country.”
RARE EARTHS GET A JOLTSpeaking of China, demand has only increased for so-called rare earths that are vital in the manufacturing of everything from electric vehicles to cellphones to military hardware as the world has become more high tech. With names like scandium and yttrium, these commodities are hardly household names like copper or nickel, but they are in many ways more important to the functioning of the global economy. The other thing to know about this industry is that it’s dominated by China, which accounts for about 78% of global output, compared with about 7% for the U.S., according to Bloomberg News. So it’s understandable President Xi Jinping’s visit on Monday to a rare-earths facility raised some eyebrows, immediately fueling speculation that the strategic materials could be weaponized in the trade war, Bloomberg News reports. Recall that China’s restrictions on exports earlier this decade triggered price spikes and fears of a shortage. VanEck Vectors Rare Earth/Strategic Metals ETF surged as much as 8.17% on Monday in its biggest gain since October 2011. It’s also notable that rare earths made it to a draft of Chinese goods that the Trump administration planned tariffs on, only to be scrubbed from the final list in September. Rare earths haven’t been a great investment. The MVIS Global Rare Earth/Strategic Metals Index has fallen 83% since peaking in April 2011, compared with a slide of 53% for the Bloomberg Commodity Index.
TEA LEAVESSales of existing U.S. home sales have been on a roller coaster ride in the first few months of the year, soaring 11.2% in February before crashing 4.93% in March. To put those swings in context, sales have only increased or decreased by 0.25% a month the previous 36 months. No doubt, the most recent two months were impacted by the government shutdown, depressing sales in February, and giving them a jolt on March after the federal workers got back on the job. What this all means is that the data for April due out Tuesday should provide a cleaner read on the all-important housing market. The median estimate of economists surveyed by Bloomberg is for a 2.7% increase in sales to an annualized rate of 5.35 million. That compares with the average of 5.42 million over the past 36 months.
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Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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