By Alan Bush | Senior Financial Economist at ADMIS
Of course, there is no such thing as the “Global Central Bank,” but if there was, and I am not advocating for one, it should be leaning toward the side of accommodation. In light of the ongoing trade issues between the U.S. and China, Brexit and other geopolitical uncertainties with their negative impact on global economic growth, now is not the time for tighter credit policies. In fact now is the time for the world’s central banks to move toward accommodation. It is clear that growth in the global economy is slowing.
The Organization for Economic Co-Operation & Development cut forecasts again for the global economy in 2019 and 2020, following previous downgrades, as it warned ongoing trade tensions and a further erosion of business and consumer confidence are all contributing to the slowdown. The OECD forecast that the world economy would grow 3.3% in 2019 and 3.4% in 2020. These forecasts represent cuts of 0.2 percentage points for 2019 and 0.1 percentage points for 2020, compared to the OECD’s last set of forecasts in November. The global expansion continues to lose momentum, as it downgraded the 2019 GDP forecast for almost every Group of 20 nations, including the U.S., China, the U.K. and many countries in the euro zone.
In its report the OECD said substantial policy uncertainty remains in Europe, including over Brexit, as a disorderly exit would substantially increase the costs for European economies. In addition, the OECD said “Growth outcomes could be weaker still if downside risks materialize or interact.”
In addition, the International Monetary Fund scaled back its economic growth forecast for 2019, reducing growth expectations from 3.7% to 3.5%, and the forecast for 2020 fell 0.1% to 3.6%. The IMF cited the U.S.-China trade conflict and Britain's exit from the European Union, which pose substantial risks to global economic growth.
It is my contention that the decline in stock index futures last December took place because the market correctly foresaw an imminent slowdown in the global economy. The market “knew” the global economy would stall in 2019 and corporate earnings growth would likely slow. In addition, the sell-off late last year was fed by fears that an overly aggressive Federal Reserve in 2019, with predications of three more fed funds rate hikes in 2019, could dim the economic outlook even further.
Chart from QST
So why are stock index futures so strong this year, including new record highs for S&P 500 and NASDAQ futures when most of the economic news has been on the weak side? In fact, the S&P 500 index is up 17.4%, which more than made up for the over 9% drop in the final month of last year.
All of this shows that markets look ahead, while the reported numbers reflect the past. Currently, early indications of first quarter activity are as poor as the stock index futures market performance has been good.
Could it be that investors see a resolution to the U.S.-China trade dispute? This is possible, and in my opinion an agreement will take place sooner rather than later. However, could there be other bullish factors at work here, something very powerful, possibly a fundamental that dominates in the long run? I think there is. Could it be that the market is correctly sensing that the world’s central banks are moving toward accommodation, especially the European Central Bank and the Bank of Japan? Even the Federal Reserve has pivoted after raising rates in December and now is making it clear that it's willing to pause from hiking rates and will monitor incoming economic data. Financial futures markets, while predicting the Federal Open Market Committee will keep its fed funds rate on hold this year, are showing there is a relatively small, but increasing probability that the FOMC could lower its key interest rate in 2019.
Stock index futures have moved higher in spite of concerns about a slower rate of corporate earnings growth. Ironically, the reduced rate of global economic expansion is causing the “Global Central Bank” to move toward accommodation this year, or at least not become more restrictive, which in turn, will likely be the catalyst for higher prices for stock index futures.
For more information about these markets, please contact Alan at 312.242.7911 or via email at email@example.com. Thank you.
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Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The risk of loss in trading futures and options can be substantial. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. Research analyst does not currently maintain positions in the commodities specified within this report. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
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