Daily Commentary BY THE CURVE TEAM –

The Tide is Turning

8th of March, 2019

Concerns over global growth were laid bare overnight while there are growing signs the trade talks are heading south, both of which have moved markets and have us on the precipice of some big breakouts.

Only a few months after calling time on their quantitative easing program and the ECB was back tracking overnight. Growth in Europe has been under pressure recently due to a number of factors including escalating geopolitical tensions, trade wars and protectionism.

Following their latest meeting overnight, ECB President Mario Draghi said that “The impact of these factors is turning out to be somewhat longer-lasting, which suggests that the near-term growth outlook will be weaker than previously anticipated.”

As a result the ECB has downgraded both their growth and inflation forecasts, throwing concerns over the broader global outlook back into the spotlight.

Speaking about the Eurozone economy, Draghi said that “growth is below trend now and the output gap is opening up again.” As a result the ECB is going to launch a new round of funding for banks in order to support growth. Don’t be surprised if we see the ECB re-launch QE in the coming months.

There are also growing concerns that the trade talks between the US and China are heading south and despite all the positive talk, a meaningful deal still seems unlikely. The gulf between the two nations on the topics that matter are just too far to bridge.

The New York Times reported overnight that

“The biggest barrier to a deal continues to be the enforcement of terms, said people familiar with the discussions. The United States has insisted that it retain the right to respond unilaterally by raising tariffs if China violates the agreement, without Beijing retaliating. But some Chinese officials have criticized the arrangement as a potential infringement of China’s sovereign rights”.

The highly anticipated meeting between the two leaders, which is expected to culminated in the announcement of a deal, is also in doubt with the same report saying:

“Chinese officials face an obvious dilemma in asking their president to fly all the way to Mr. Trump’s club at Mar-a-Lago, Fla., without a clear understanding of the final details. . And persuading Mr. Xi to attend such a summit is no easy task, given his imperative of appearing strong before a domestic audience.”

All the above has hit markets overnight. The EUR was hit the hardest and is now on the precipice of breaking meaningfully lower. This would have big ramifications for the USD and in turn all other currencies globally. The AUD is also looking wobbly and could break lower which would be of some help to the RBA and give them some breathing room.

Equities were also under pressure with US markets teetering on the brink of rolling right over. More importantly bonds globally are bid again, pushing yields lower. We aren’t there yet but a perfect storm appears to be brewing once again.

David Flanagan

Director - Interest Rate Markets