Category Archives: European Union

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Where The Risks Are: It’s Not Where You Might Think…


  • Car sales are in a downtrend and PMI is falling, which ties the FED’s hands.
  • Japan has just entered into direct economic stimulus with $273 billion.
  • The Bank of England behaves like the economy is in a depression, cutting rates and printing money.

Introduction

Yesterday we discussed how China isn’t as big of a risk as many would like to make it out to be. Today, we are going to go through the latest data from the U.S., Japan and Europe in order to assess their riskiness.

The U.S. 

We already discussed on Tuesday how the GDP has grown at a slower rate than expected and the actual growth is fueled by increased consumer debt, which isn’t a sustainable long term situation. Going into more detail will enable us to better forecast what will happen in the short to midterm.

One area of consumer spending that is currently essential for U.S. GDP is car sales. In the first 7 months of 2016 car sales have hit a plateau, which means there is more downside than upside. Car sales peaked in October 2015 and it looks like a downtrend is forming. The peak reached in sales is especially worrisome as car loan rates have hit historical lows and are currently around an average of 4%.

figure 1 car sales and rate
Figure 1: U.S. Total vehicle sales and car loan interest rates. Source: FRED.

This explains why the FED’s hands are tied when it comes to interest rate increases. Increased rates would increase the costs for consumer debt and therefore immediately lower consumption, sending the U.S. into a recession.

If you are overweight car stocks, be careful and watch what is going on because the low valuations are there for a reason and any kind of economic turmoil might be very negative on stock prices.

Continuing on the state of the U.S. economy, the Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI), which measures factory activity, came in positive but below expectations on Wednesday. The PMI declined from 53.2 in June to 52.6. Any reading above 50 signals activity is expanding which is a good sign, but a downward trend isn’t ideal to see as most indicators were slower than in the previous month.

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Figure 2: U.S. manufacturing. Source: ISM.

Apart from the decline in activity, it is also important to note how the PMI reacted to the FED increasing interest rates in December 2015. The expectation of an interest rate increase alone decreased the PMI, and only with the later change in the FED’s rhetoric did the PMI return back into positive territory.

figure 3 the fed and PMI
Figure 3: PMI index in the last 12 months. Source: ISM.

This is yet another indication of how difficult it will be for the FED to increase rates as businesses and people have gotten used to low rates and any increase would immediately lower economic activity, pushing the FED to step backwards.

Japan’s Easing

On Tuesday Japan’s prime minister, Shinzo Abe, approved a $274 billion stimulus package aimed to help the Japanese economy and to help ensure his political survival. The package includes $173 billion of fiscal measures, $73 billion of government spending and $59 billion in low cost loans.

As this is a step beyond monetary easing, we will see what the impact will be on the Japanese economy. Analysts expect added economic growth of 0.4%.

The conclusion is that, if everybody is easing, it doesn’t make much of a difference and forces other central banks to do the same. This is the third reason in this article that makes it difficult for the FED to increase rates.

UK

The situation isn’t better in the UK.

While the major economic impact of BREXIT won’t be seen for two to four years, the first signs of a slowdown can be seen from the weaker sentiment. The UK Manufacturing PMI came in at its lowest level since 2013, which was a recession year in Europe. What is also important is the sharp decline, the PMI index fell to 48.2 in July from 52.4 in June which confirms BREXIT related uncertainty.

figure 4 uk pmi index
Figure 4: UK manufacturing PMI index. Source: Markit Economics.

On top of the negative PMI, the Bank of England has slashed its growth forecast to 0.8% from 2.3% for 2017, lowered interest rates to a record low, and announced increased lending of 100 billion pounds to banks. It will also increase bond purchases by 60 billion pounds. The Bank’s actions portend an outright depression in the UK rather than a possible future economic slowdown, but this is what central banks do these days.

Europe

A positive note comes from Europe which saw its PMI grow in July to 53.2.

figure 5 gdp pmi europe
Figure 5: Europe PMI. Source: Business Insider.

But the negative news is that GDP growth in Europe is expected to only be 0.3% in Q3 2016, further emphasizing the already bad decline to the 1.2% annualized growth rate in Q2 2016. All eyes are on the ECB which has stated many times that it will do whatever it takes to keep things stable and growing, thus, more stimulus.

Conclusion

The main question is: how long will central banks be able to keep things stable and markets high, and when will monetary and fiscal stimulus become inefficient and spur inflation? All factors indicate that the markets are overvalued, the economies are stretched and monetary stimulus is reaching its limits. As soon as signs of a normal economic cyclical downturn emerge, central banks step on the gas and print more money.

On one hand, investing logic would indicate that investors stay in cash as a bear market is imminent, but the fact that central banks keep printing money and saving markets, or not even allowing markets to decline, indicates that stocks and bonds will be artificially propelled even higher and investors might want to stay long these markets for the time being rather than fight the trend.  However, having well thought out stop loss orders in place is a must, and raising some cash would be prudent too because at some point things will turn.

It is important to keep an eye on inflation because low or no inflation is what is enabling central banks to continue with easing. As soon as inflation increases, central banks will have to start tightening.  Consumer price inflation is still at only 1%.

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Figure 6: U.S. inflation annual inflation rate per month. Source: Trading Economics.

As we discussed yesterday, China is growing at 6.7% per year, has low debt when compared to developed countries yet and is considered a risk. While developed countries use desperate measures to keep things as they are, fight deflation and spur some economic growth. Logic suggests that the risks lie in the developed world and China is a much safer bet.

 

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Could the Economic Climate in Europe Be Contagious?


  • The first hard data after the BREXIT won’t be available until October, but property funds are already frozen.
  • The decline of the pound will lower UK GDP and will spill over into Europe.
  • Italian banks are in trouble as 25% of GDP are nonperforming loans.

Introduction

As two weeks have passed since the BREXIT debacle, most heads have cooled off and we can calmly look at the current situation in Europe, the repercussions of BREXIT and contagion risks. It is important to analyze the full potential impact of the BREXIT by analyzing the stability of the European financial system, business investments, hiring and the political risk premium.

As BREXIT was popular primarily amongst the older population, politicians campaigned on a platform that promised that the money currently being spent on the EU would be diverted into the UK’s national healthcare system, the economic implications of which could be huge.

Situation in Europe

Europe could have done without this BREXIT vote as the last recession just ended in 2013 and the economic consequences will certainly have a detrimental effect on the growth experienced in the last two years.

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Figure 1: European Union GDP annual growth rate. Source: Trading Economics.

We shouldn’t forget that the UK is still part of the EU and will remain so until all the administrative issues are resolved, presumably for the next two years or possibly even for the next four years. As GDP is always measured in dollars and the pound fell by about 10% in the last quarter in relation to the dollar, we can expect a decline in UK GDP (measured in dollars) similar to what was experienced when the UK left the European Exchange Rate Mechanism in 1992.

figure 2 UK gdp 1980s, 90s
Figure 2: UK GDP in the 1980, 90s. Source: Economics Help.

What saved the UK economy back then was a cut in interest rates, but as the current interest rate is 0.5%, not much can be done there. As the UK’s GDP is $2.8 trillion, it makes up about 15% of the EU economy, so a decline in the UK’s GDP will certainly have a detrimental effect on the EU GDP. An economic slowdown would make credit agencies downgrade the UK or possibly other countries in Europe and thus would create a domino effect of bad news. Moody’s has already expressed concerns about the BREXIT and stated that it will probably change its outlook for the UK from “stable” to “negative,” and Fitch predicts 2017 to be a record year for sovereign downgrades.

In addition to the impact on its currency, the UK economy will be hit by changes in the employment market as well. Some businesses will be forced to move their London branches to elsewhere in Europe. HSBC bank has announced that it will move 1,000 trading jobs to Paris, the same is true for Morgan Stanley, and let’s not forget that London is the European center for financial start-ups which will also have to be moved to somewhere in the EU to serve their primary markets.

The first impact the BREXIT has had is on UK real estate. $23 billion worth of assets in property funds have been frozen for withdrawals. Aberdeen Asset Management marked down the value of its UK property fund by 17% and suspended redemptions with an explanation that this will give time for investors to reconsider. The reality behind this funny explanation is that there is simply not enough liquidity behind the assets for redemptions. A halt in liquidity is also one thing to worry about in Europe.

We won’t know the full impact of the BREXIT for some time as most of the data won’t be published until after Q3 2016 is over. As the BEXIT repercussions become more clear throughout this year, some other risks will emerge as investors become more risk averse in this uncertain European political and economic time.

Italy and Its Banks

In uncertain times, investors look for safety and are much more risk averse. Some assets that were once not considered risky suddenly become risky. As investors withdraw their funds from the riskier assets, those assets consequently become even more risky as there is a lack of liquidity.

This is the situation with Italian banks. Not that Italian banks were ever considered that safe, but at this moment they might tip the stability of the European financial system. It is assumed that Italian banks sit on $401 billion of bad debt, equivalent to a quarter of the country’s GDP. For comparison, the percentage of U.S. nonperforming loans is 1.15% which is around $103 billion or 0.6% of U.S. GDP, thus 42 times less than in Italy which clearly implies that Italy is about to implode if the ECB does not intervene.

On top of Italy’s banking troubles, the country’s own prime minister certainly doesn’t know how to put a fire out. Instead of keeping things as calm as possible he immaturely attacks other EU banks stating that their derivatives exposure is a hundred times bigger problem than the Italian debt issue.

With the BREXIT and other populist leanings—including in Italy as evidenced by the statements by its Prime Minister mentioned above—the European markets should be terrible. In such a climate you’d think there would be plenty of bargains around, but the opposite is true.

Valuation

All of the above may settle down, but the stock market in Europe is highly overvalued for such a political and financial mess. If you look at the iShares MSCI Italy Capped ETF (NYSEArca: EWI) it has a PE ratio of 12.79 but the biggest holdings are oil ENI which is losing money, highly indebted utilities ENEL and the biggest Italian bank Intesa San Paolo which will be in for a wild ride if a banking crisis hits Italy. Therefore, Italy and all other European companies are far overvalued for the potential risks.

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Figure 3: European PE ratios. Source: Star Capital.

It wouldn’t be a surprise if the above PE ratios are more than halved in the next year or two as a consequence of the BREXIT, which is just a symptom, and debt which is the real disease. As the ECB is buying corporate bonds on the open markets, even the ECB might be in trouble as there is nobody who can bail the ECB out.

Conclusion

The expected sovereign downgrades will push the dollar higher as global investors will seek safety which should negatively impact U.S. exports. Any kind of potential European crisis will bring turmoil to U.S. markets but investors can prepare for that by carefully assessing the situation in Europe.

Traders may want to seize the swings between bad news and ECB interventions, and long term traders might just want to short Europe as a weaker euro will make it easier to cover in dollars.

In general, we can expect uncertain times ahead of us. The last European financial crisis in 2012 with Greece as a culprit resulted in a European recession. The current situation doesn’t look much different, only this time Italy and the BREXIT will probably be the culprits.

 

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Is BREXIT Just Noise?


  • Markets fell on Friday but they are exactly where they have been in the last weeks.
  • BREXIT is noise, investors should focus on slower global growth and fragile financial systems.
  • The market is still overvalued in historical terms but there are some opportunities.

Introduction

An avalanche of articles since last week’s BREXIT is forecasting terrible things for the world economy and financial markets especially. Most focus on the huge declines stock markets saw on Friday, but let us first take a closer look. The UK FTSE 100 index fell 3.15% to 6,138 points on Friday, but all-in-all it was a positive week as last week started with the FTSE at 6,021 points.

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Figure 1: UK FTSE 100 index in the last month. Source: Bloomberg.

Of course this is only the nominal decline. As the pound declined by 9% toward the dollar, FTSE losses for U.S. investors ended up at 13% in total on Friday.

The S&P 500 also fell 3.59% on Friday, but this was mostly due to the appreciating dollar. As the dollar appreciates, U.S. corporations see their international earnings deteriorate as more than 30% of revenues comes from abroad.

figure 2 dollar spot
Figure 2: Dollar index spot. Source: Bloomberg.

But again, the dollar is just back to where it was at the beginning of the month and the S&P 500 to where it was exactly one month ago on May 23. The point of this introduction is to make investors aware of the difference between noise and real structural significant influences.

What’s Important for an Investor and What’s Just Noise

In the BREXIT aftermath you will be bombarded with various crazy headlines like “FREXIT” (France leaving EU), but don’t let this move your focus from the important things. The important things are that the BREXIT will for sure have a negative impact on the already negative trend of slowing global economic growth. The World Bank has already revised its global growth expectation downwards from 2.9% to 2.4%. The BREXIT will further lower the amount of investments in and from the UK and consequently, Europe. This might push global growth even lower and keep growth in Europe subdued.

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Figure 3: Global, Europe and advanced economies real GDP growth expectation. Source: World Bank.

Slower global economic growth and activity will have an impact on every aspect of economic life. But, as usual, central banks will do their best to keep things stable by adding more liquidity. The European Central Bank issued a press release immediately after the BREXIT vote stating that it “stands ready to provide additional liquidity, if needed, in euro and foreign currencies.”

This policy of constant liquidity adding by central banks has been working well in the last seven years but involves some risks. The major risk is that markets change their perspective on monetary policy as an important enough factor for market stability. As soon as central banks become unable to protect the markets with their added liquidity there is nothing to stop the markets from a free fall. Also, the increased liquidity provided by banks with no economic traction would spur inflation. Such a scenario could bring a rare economic situation called stagflation: high inflation and economic stagnation.

The second risk is also related to monetary policy and BREXIT. BREXIT being the cause and monetary policy being the reason. The low interest rates and high liquidity has brought high levels of debt globally and uncertainties about whether the central banks are going to be able to keep things stable without spurring too much inflation in an environment of continuous abundance of liquidity. This risk influenced most European banks to fall between 10% and 15% last Friday, but this was only the tip of the iceberg as the above mentioned reason lowered their share prices by about 50% in the last year.

figure 4 European banks an U.S.
Figure 4: European banks stock price in last two years. Source: Yahoo Finance.

UK Barclays, German Deutsche bank and Italian Intesa all fell by about 50% or more in the last year. The best performing bank in the above chart is Wells Fargo which has fallen only 20% in the last year. This weakness in the financial sector signals that the provided liquidity is still keeping the markets stable, but the decline of bank shares indicates that the markets are not as healthy as they used to be.

The most important thing of all for corporations and their stock prices are, of course, earnings. The stronger dollar will undoubtedly lower corporate earnings and make the already historically high valuations look even more overvalued.

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Figure 5: S&P 500 PE ratio. Source: Multpl.

As the above figure shows, the S&P 500 PE ratio has only been higher than the current level on a few occasions. Recent historical examples of higher or similar PE ratios are the 1960s bull market that resulted in a decade long 1970s bear market, and the dot-com bubble and bust. The 2009 spike is related to the 2009 crisis that lowered earnings and not to market overvaluation.

Conclusion and What Can Be Done

In an environment with huge liquidity, high valuations and uncertain economic prospects, there are some things an investor can do. If the high liquidity ignites inflation, it is always good to be exposed to assets whose quantity is fixed. Such assets are commodities. Precious metals in particular as their value increases with economic turmoil. All other commodities should benefit if inflation is ignited and the global economy continues to grow.

An investor can look for companies with low PE ratios and stable non-cyclical revenues, like utilities, communications or consumer staples. It is not easy to find companies like that in this overvalued market but there are a few—like AT&T (NYSE: T) or Southern Company (NYSE: SO)—that look attractive with their PE ratios below 20 and dividend yields north of 4%. A PE ratio below the average does not mean that the price of those stocks will not go down in a bear market.

In any case, investors should brace for volatility ahead as negative economic repercussions keep constantly coming up. Now it is the BREXIT, not so long ago we had the Chinese slowdown crisis in August 2015, low oil prices in January 2016 and as more such things are bound to happen in the fragile, overvalued, highly liquid markets, every investor should prepare for volatility.

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Is Global Recession On Its Way? Brexit May Be A Warning Sign…


  • Global GDP growth rates are stalling even with increased monetary stimulus.
  • There are several potential recession triggers.
  • It is important to assess the risks a portfolio runs as no one can know when a recession will come, but eventually it will as it always has.

Introduction

The main FED goals are sustainable economic growth and full employment. In order to achieve those goals, the FED has decided not to increase interest rates as the economy is still relatively weak and employment has been slowing down. Not only that, but the expectation of future interest rate increases has been revised downwards.

This brings several consequences. In case of an economic downturn, which would be completely normal as we have not had one in the last 7 years, the FED has no maneuvering space left to help the economy as the interest rates are still at recession levels.

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Figure 1: U.S. GDP growth to date. Source: Multpl.

As the last recession was 7 years ago and every economy is cyclical, we should not be surprised if a recession comes along. No one can know when this will happen as recessions always come unannounced, but we can take a look at the risks that can trigger a recession and the consequences of it.

Potential Recession Triggers

Brexit

A vote in favor of the U.K. to leave the EU might influence some longer term market disruptions as London is the European financial center. The U.S. Treasury Secretary recently issued a warning stating that the global economy would be damaged if the U.K. leaves. The recent polls show a scary shift toward a leave.

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Figure 2: Brexit polls. Source: Financial Times.

The ‘remain’ has always been greater than the ‘leave,’ but it seems that the undecided are turning toward a leave. Next week will be an interesting one as we will see the long awaited Brexit vote confirmed, be it a leave or a remain.

Another Bad Summer in China

Last summer we had the first meaningful stock market fall in the last 7 years as the Chinese stock market precipitated on weaker Chinese growth.

3 figure China GDP growth
Figure 3: Chinese GDP growth per quarter. Source: Trading Economics.

As China is increasing its debt levels in order to force economic growth, the long term perspective is one where if all goes well, China will have stable growth levels but any global shock like the above Brexit might influence further slowing down and a global deflation spiral.

4 figure china debt to gdp
Figure 4: Chinese debt to GDP. Source: Trading Economics.

Debt usually means trying to hold on to the status quo until there is liquidity. The above increases in Chinese GDP show that China is desperate to keep its growth rates as it might implode without high growth rates.

As China and all other economies are dependent on global trading, any indication of global isolation would quickly spur discomfort into the market and this brings us to the next possible trigger.

U.S. Isolationist Tones

Currently Clinton is ahead in the polls but the Brexit example shows how we cannot bet on polls. If Trump’s isolationist rhetoric is more than just election tactics this could have a severe impact on U.S. trade and global economics. History has proved that any kind of isolation is detrimental to economic growth and wellbeing, and the current high standard we are enjoying is a result of global integration increasing its speed in the last three decades.

Global Monetary Policies Imbalances

With the FED slowing down, this is less of a concern as the higher U.S. interest rates would have strengthened the dollar and lowered U.S. exports. Everything produced in the U.S. would have been more expensive and U.S. corporate earnings would have been lower in dollar amounts.

Countries like India or Brazil, where interest rates are relatively high, are still not such a big influence on the global economy, but an economic rebound or inflationary pressure in one of the global economic pillars like Europe or the U.S. would trigger worldwide financial instability.

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Figure 5: Global interest rates are at historical minimums. Source: Trading Economics.

The event of such a situation is highly unlikely especially after the FED has slowed down with its interest rate plans and the situation in Europe is not indicating economic exuberance.

Europe

Europe is the next risk factor for global markets. Even if we haven’t had a ‘Greek’ moment or a bank crisis for a while as the European economy is growing, that growth is still not stellar and has already peaked.

6 figure EU growth
Figure 6: European GDP growth. Source: Trading Economics.

EU growth has reached 2% in 2015 but is already declining and sits at 1.8% currently. This is a good number for Europe as the 2012/2013 recession is not far away, but the growth is fueled by increased debt levels and the non-performing debt ratios are scary for EU banks.

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Figure 7: Non-performing debt ratios for EU banks. Source: European Central Bank.

For comparison, the average U.S. non-performing loans are at 1.67% which is much lower than the EU 7%.

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Figure 8: U.S. non-performing loans. Source: Statista.

Therefore, Europe not only has the ‘Brexit’ issue as a potential destabilizer but also bank fragility and the fragility of the whole economy.

Understanding of Risk

The last risk related to global markets is the assessment of risk investors have. With yields at historical lows, investors might be losing the perception of risk, especially as central banks run to save the markets as soon as any decline is anticipated.

A shift in the perception of risk might be the biggest risk of all as we have seen that after the FED decided to keep rates steady and lower for a longer period of time, the DOW index declined and did not, as usual, increase based on continued FED stimulus.

Conclusion

The scope of this article is not to be the chicken little but to objectively assess real risks to your portfolio. A recession would be catastrophic at this moment as central banks are out of firepower. Maybe they can keep markets at a permanent high level with low interest rates, but there are several structural and cyclical longer term forces that come into play here and cannot be influenced by monetary policy.

The U.S. is approaching full employment, corporate earnings and investments have been declining for a while even though interest rates are still low. As we already mentioned, we cannot know when any of the above described risks will kick in, maybe even next week with Brexit, or not in the next few years.

Eventually a recession will come, as it always does, unannounced and surprising, nobody knows when but it is good to think of how risky is your portfolio in relation to that and if maybe the same returns can be reached with less risk.

 

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A Broader Perspective on the Global Economy


  • Easing monetary policies go on globally but do not seem to fuel sustainable growth.
  • China is slowing, Japan is looking toward another recession, and the global outlook is adjusted downwards.
  • Bad news might be around the corner, but good news is as well.

Introduction

News is usually focused on the latest happenings. The fact that the human brain is set up in a way that it always tries to focus and eliminate marginal information brings to the consequence that most people do not objectively analyze the world around them. An example: How many blue cars have you seen today? Probably none because you were not looking for them, but as soon as you focus on them you will be surprised by how many you will see. The same applies to finance.

Just two and a half months ago the S&P 500 was 12.5% lower than now and headlines were filled with negative scenarios. Oil prices were below $30 and investors looked to avoid any kind of risk by selling stocks and buying bonds. Then, on February 11, FED Chairwoman Yellen hinted to Congress that “the central bank had increased trepidation over the path of interest-rate increases, pointing to accumulating risks to the economy in recent weeks.” The market focused on prolonged low interest rates and not on the accumulating risks in the economy. This article is going to give a broader perspective on the current state of the global economy in relation to financial markets by taking a look at the situation in the strongest economies.

The US

The main economic indicator, albeit one that shows only what has happened, is the Gross Domestic Product (GDP).

Figure 1: US GDP estimates and actual. Source: The Wall Street Journal – Economic Forecast.

The Wall Street Journal has surveyed 60 economists and their estimations are positive and project stable growth of more than 2%. As shown in the figure above, the previous estimates (red line) are usually stable and positive, while actual results (grey columns) are much more volatile and with negative surprises.

There is a rule in finance where if you are wrong with your estimation alongside others the collective wrongness saves you, but if you are wrong and your opinion is far from consensus, your career is at risk. Unfortunately, this usually brings stable, similar estimates close to each other and big actual surprises.

A more scientific way of estimating GDP is done by the Federal Reserve Bank of Atlanta with GDPNow, as it uses only econometrical models based on economic data variables. Figure 2 shows how this metric diverges from the general consensus above.

Figure 2: Atlanta FED GDPNow forecast. Source: Federal Reserve Bank of Atlanta – GDPNow.

The GDPnow model is forecasting only 0.3% growth for Q1 2016. The first advanced estimate from the Bureau of Economic Analysis (BEA) for the first quarter 2016 is due on the 28th of April and will show who is correct, in any case it could be market moving news.

Japan

Japan is still finding it tough to reach stable economic growth. “Abenomics,” the monetary easing policy implemented by Japan’s prime minister Shinzo Abe in 2012, is failing to produce the expected results. If Japan experiences another quarter without growth it will be just another recession that has plagued Japan’s economy in the last two decades.

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Figure 3: Japan’s GDP growth. Source: Trading Economics.

A recession in Japan should not make a big influence in international markets as it is generally expected that Japan stagnates, but both the incapacity of creating economic growth—even with a negative 0.1% interest rate—and the aging population strongly resembles the situation in Europe.

Europe

The Eurostat will publish preliminary flash estimates of quarterly GDP for the EU area on the 29th of April, synchronizing publications with the BEA (usually 15 days later). This is another piece of information that will be interesting for markets.

Estimates from the European Commission are that the EU area will grow by 1.9% in 2016, but the European Central Bank’s (ECB) decisions do not support such a positive forecast. Last week ECB president, Mario Draghi, left the current low interest rate and market purchases policy unchanged and hinted towards further easing in order to bring the EU economy to the expected levels. Almost two years of interest rates close to zero and the ECB purchasing even corporate bonds did not yet push the EU economy towards the hoped levels, an indication that strong growth for the EU might be difficult to reach. Also, Markit’s Composite Flash Purchasing Managers’ Index is showing signs of slowing growth, falling to 13 month lows in March 2016 for the EU.

Other political issues threaten European growth in 2016. The UK will vote on whether to remain in the EU in June and the pre vote polls do not indicate a clear winner. The UK leaving the EU would have significant economic repercussions and increase the political uncertainty that would strongly influence the Euro and the markets. The immigrant crisis from the Middle East is still a concern and possible increases in border controls might further slow economic trade.

Apart from the negative view, there is always hope that the easing policies will work, the weak Euro promotes exports, the UK might vote to stay in the EU, and immigration might help improve the negative demographics in Europe.

China and Emerging Markets

A fact that was soon forgotten is that the Chinese economic growth in the last few quarters was the slowest in the last 25 years.

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Figure 4: Chinese economic growth from 2010 to 2016. Source: Trading Economics.

China is still growing but many expectations and models that were based on higher growth rates have to be amended. The economic slowdown did induce the huge drop in commodity values in 2015 and that effect will surely reflect itself in local and global economic measures.

China sneezes and emerging markets get a cold. The largest economic downward adjustments are seen in emerging markets, of which Brazil and Russia are the most pronounced. The International Monetary Fund (IMF) expects that the prolonged slump in commodity prices will have a severe impact on emerging markets as they base their economies on exports of primary goods. Africa’s growth is expected to be around 3.7%, thus far from the usual high single digits.

Conclusion

A quick look at what is going on globally does not give much inspiration. The news did not change much since February except that central banks are going to continue with quantitative easing that gave relief to markets. But, the outlook is much bleaker than it was a year ago and the low commodity prices do not contribute to a global increase in economic activity. The IMF predicted in its February outlook that global growth in 2016 would be only 2.5%, which is 35% lower than the average of 3.8% for the last 6 years.

Even if the above data might be a little bit pessimistic, to brighten up the article, China, Africa, the US and Europe are all still growing, albeit at a slower pace so severe economic crises are not expected. But negative news may be just around the corner, so investors should be careful when assessing their risks.