Tickmill UK Daily Market Notes


Tickmill Representative
Small-Cap vs. Large-Cap Stock Rotation: How it can predict a slump in the US economy?
Fed Policymakers confirmed their marked shift in tone after their meeting on Wednesday, with a downward revision of inflation and GDP forecasts, as well as significant downgrade of the dot plot. Fixed-income securities rose sharply as they reached on only one increase in 2020.

Prices of US Treasury bonds posted the highest daily gain for several years as the meeting basically led to an unexpected downside revision of nominal rate and inflation outlook. At one point, bond yields fell below the effective federal funds rate.

Surprisingly, the appetite for risk assets also remains steadily high, as can be seen from the returns of the S&P500, confidently targeting the historical peak of 2900 on Thursday.

The demand for stocks and bonds reflects a diametrically opposite attitude to risk. This is due to a differing degree of certainty in future cash flows. Theoretically, it’s also due to the fact that the growth of stocks is accompanied by a decrease in the value of bonds, and vice versa. However, this is not always the case.

Since the beginning of 2019, both the stock market and bonds have risen, which raises the question of an unobservable factor breaking the correlation. Either the stock market knows something more than the fixed income market, or vice versa. The latter option is more likely, as disturbing movements in bonds are known for their predictive potential.

The yield on 10-year securities went down to 2.539% on Friday, which was last observed in January 2019 when rumors began to circulate about the end of the recovery phase and the imminent transition to recession. In particular because of the “error” in the Fed policy.

More recently there are also examples where stocks and bonds have been growing simultaneously. For example, in February 2016, the yield on 10-year Treasury bonds decreased from 2.32 to 1.36% over six months. In the same period, the stock market grew by 17%.

The boost for both stocks and bonds came largely from the Fed who announced a pause in tightening until almost the end of the year, and only then resumed rate hikes.

The current situation is very similar to one back in 2016. A study of the causes of concern back then in the fixed-income market, in particular the two leading indicators, could make it possible to understand what considerations investors in bonds are guided by today.

Firstly, it’s worth noting that in 2016 the Chinese economy failed, as can be seen from the slump of export orders for the country’s manufacturing sector. As China’s main trade partner is the United States, the fall in Chinese export orders is largely a reflection of the decline in demand for imports to the US. This is a mechanism for transmitting a fall in economic activity from a leader in production to a leader in consumption. Now, when one of the worst times in Chinese history has come for their manufacturing sector, we can expect a sluggish increase in import prices in the US (which also determines the dynamics of consumer inflation in the US). As a consequence, we can also expect a fall in compensation for inflation in US bonds. The chart below shows how closely China’s export orders and US bond yields are.

Export orders are the leading indicator that predict consumption of imported goods in the US.

It’s also prudent to mention that when trying to predict economic fluctuations, it’s useful to take our attention to stock “rotation” in the US. There is value vs. growth rotation as well as small-cap vs. large-cap rotation happening, depending on underlying economic trend. Small-cap stocks are usually more vulnerable to cyclical factors as their number prevails in cyclical sectors of the economy. For example, in sectors like retail, real estate, raw materials processing, production of some non-sophisticated goods and the restaurant and hotel industry. Such concentration in sectors is logically related to the level of their capital intensity.

If managers expect negative cyclical factors to take effect, then plans for output and investment will be adjusted accordingly. Investor expectations will also be lowered. Accordingly, the dynamics of the shares of small vs. large capitalization can be expressed by a simple ratio of the corresponding indices for example: Russell 2000 and the S&P500.

If we compare the joint dynamics of this relationship and the yield of 10-year securities, it can be seen that the flow from small companies subject to cyclicality, to large-cap companies is accompanied by a drop in bond yield. This is logical if the economy is going to slow down.

These indicators shed light on the near future of economic activity in the US, which may soon go into a slowdown phase. The question remains however: what contributes to, and for how long will the US stock market growth last?

We always want to start a conversation so, get involved and let us know your opinion!

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.


Tickmill Representative
Should we dismiss February retail sales data again? What about other reports?
After some dire January retail sales figures following the US Government Shutdown, February’s data was expected to recoup some of the emotional balance of investors. However, despite the market writing off some of the issues associated with the shutdown in January, February’s data did not bring back much harmony.

Sales in the retail sector declined for the second month in a row, according to preliminary estimates. Despite the fall in the broad index being less dramatic (-0.2% against the forecast of 0.2%), the change in the core index (-0.6%) has seriously jeopardized the path to target inflation. Two months of decline in retail sales, coupled with mediocre demand for durable goods and falling residential investment, spells bad news for the US economy, where about 70% of GDP is consumption. But, let’s not rush to judge without taking a look at the revisions…

Sales in the control group, which some economists view as a clearer “imprint” of consumer spending on retail goods, also fell by 0.2%. Indicating that the US is missing its growth target. A positive point, however, was the revision of sales in the control group to 1.7% in January. This gauge attempts to provide the best estimate of volatile discretionary purchases, which are highly dependent on behavioral factors. Factors include the perception of future income and well-being, which come after the necessary purchases. Actually, in contrast to the base indicator, where fuel and car parts spending are excluded, construction materials and food products are also not included in the control group indicator.

The upward revision of the rest of retail sales estimates suggest that, it’s too early to wait for a correct estimate of consumer spending in the first few months of 2019. In 2013, the shutdown of the government (shorter than the last) also affected data collection and processing and created huge discrepancies between the preliminary and revised readings, which were resolved only after three months.

According to the current data in annual terms, broad retail sales index grew by only 2.2%. It should be noted that in the summer of 2018, the YoY growth rate was about 6.8%. By the end of last year however, it went off the growth path quickly due to seasonal factors, which normally tend to boost consumer spending. In December, retail sales found a bottom at 1.6% growth, which was the lowest reading since January 2014.

Retail sales declined in 7 of 13 categories, with the least spent within households on building materials and garden tools, with the corresponding figure falling by 4.4%. Purchases of electronics and household goods decreased by 1.3%, which was the worst change since May 2017.

The dollar index rose, probably ignoring retail sales for February, as the estimates continue to remain unreliable. The indices of manufacturing activity from Markit and ISM differed in assessments of the state of the sector, which resulted in polar changes in broad indices. The final estimate from Markit fell by 0.1 points to 52.4, with the figure from ISM jumping to 54.3 points.

According to Markit’s calculations, the main contribution to the decline in the index was made by the weakening of consumer demand, with some delay affecting production volumes. In this case, the next in the cyclical chain is the labour market, which should recede from the highs with the subsequent upward correction of unemployment from ultra-low levels. The leading export orders indicator barely increased according to Markit calculations. It is noteworthy that ISM made the opposite conclusions and pointed to the growth of orders and production volumes. Distortions in statistics are likely to be the cause of strong discrepancies in the estimates.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.


Tickmill Representative
Volatility preference” as a Reason for Bitcoin Growth
Considering the risk-return preference of the traditional investor, the goal of maximizing expected return should be accompanied by the goal of minimizing risk. The volatility of asset return serves as the proxy of risk and, since it has an exogenous nature (consequence of market shocks, i.e. news), it’s essential to have an intuitive understanding of the link between volatility and risk.The most generally accepted idea is that the volatility of return tends to react asymmetrically to “bad” and “good” news. After the release of bad news, the volatility of returns often increases exponentially and lasts longer than with the release of positive news.
In the stock market, this pattern is entrenched in the saying “the market goes up the stairs but goes down in the elevator”. If we take a stock as an example of an asset, the explanation of this pattern may look like this:

  1. The market experiences a negative shock.
  2. The Stock price falls.
  3. Market capitalization of the stock decreases and the share of bonds increases in the capital structure. Capital structure is defined as shares + bonds.
  4. Consequently, the risk of holding those shares increases.
  5. Thus, if the increase in volatility is associated with ‘bad news’ it’s a reasonable assumption that traditional investors may avoid the stock.
The first models investigating the clustering of volatility such as ARCH and GARCH revealed this drawback, which led to the creation of improved models like EGARCH. EGARCH allows the inclusion of an asymmetrical response to differing shocks, showing that it models the behavior of volatility much more effectively.

For some traders however, increased volatility may be preferred as opposed to being undesirable. For example, when using some simple option strategies such as straddle, increased volatility could positively affect profitability. Due to this, its only logical that some traders may be attracted towards non-traditional asset classes, including cryptocurrencies.

The recent capitulation of world central banks attempting to normalise monetary policy (declaring a pause of indefinite length) was probably one of the reasons for the synchronized inflow into the cryptocurrency market. Just this Tuesday saw a surge in popularity to the tune of $100 million, through Coinbase, Kraken and Bitstamp.

Some analysts believe that the policy of world central banks have the potential to rescue the cryptocurrency market from oblivion for a while, i.e. will become the main medium-term driver of cryptocurrency appeal.

One advantage that cryptocurrencies have in the ideological war between fiat and digital currencies, is due to the relative failure of Central Banks policy. For example, the concomitant renewal of the authorities’ interest in the blockchain, or the willingness to make concessions in their legal use, remains at just curious speculation.

If we consider volatility as a stationary process (returning to the long-term average) we can apply it to the price movement of BTC. The volatility of BTC returns were almost at historical minimum in March, before a sudden a surge of activity came along – as highlighted in the graph below.

The behavior of volatility in response to positive market shocks in non-traditional assets should now be different from the behavior of volatility in the traditional securities. This is firstly because the cryptocurrency market threw off its main speculative burden. Secondly, the standard methods of fundamental valuation of assets are inapplicable here. After all, what makes BTC a security? Thirdly, traders’ preferences are completely different here. Consequently, there are no reasons for the rejection of volatility similar to the example explained earlier in this article.

The fundamental reason for growth is still unclear. However, the coordinated movement of prices on three major exchanges, where purchases of 7,000 BTC on each exchange in one hour, suggests that this was the realisation of a pre-conceived plan. It is also curious that the daily trading volume of Tether was around the same volume as in BTC:

Obviously, the market growth was led by the BTC/USDT pair. It is also worth mentioning that Tether updated their main page, stating that each coin is backed with traditional currency, cash equivalents and other company assets.

Strong market movement was accompanied by many traders hitting their SL, trend following within crypto and the expiration of a large amount of put options on the Deribit. On Tuesday the trading volume on the digital derivatives stock exchange jumped to $40 million! This clearly indicates how important it is when analysing market sentiment, to not underestimate the impact of the derivatives market on the underlying asset.

We’re always looking to carry on the conversation, so get in touch and let us know what you think about the appeal of Bitcoin volatility!

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.


Tickmill Representative
German GDP growth revised lower unexpectedly… Is the ECB under pressure?
European stocks are sneaking up into the familiar terrain of last August, when there was a peak of healthy optimism about the European economy. Unfortunately, the current rally has nothing to do with underlying economic stability, relying entirely on signals from the ECB to fight the slowdown. The transition from signals to straight-forward action may be occurring sooner rather than later. Especially after the worrying news that the leading economic institutions of Germany, a symbol of economic prosperity in the Eurozone, updated their GDP growth forecasts for 2019 by slashing projections almost twice.

A month ago, Germany was on the brink of a technical recession, barely avoiding negative GDP growth for two consecutive quarters:

However, “rising from the ashes” became a pipedream for the largest economy of the block, especially after several German think tanks cut their growth forecast from 1.9% to 0.8%, Reuters reported. What’s most concerning is that this data is also used as an input in the calculation of the government macroeconomic estimates. Leading to far-reaching consequences like renewed pressure on the ECB and the adjustments of fiscal policy. In January, the government believed that output would rise by a modest 1.0% in 2019.

A negative jump in expectations demonstrates the sheer scale of the slowdown in Germany. Previously under pressure, not only because of a slowdown in Chinese demand for imports (mainly cars), but also due to the thinning of financial and economic ties with Britain, as well as with the reversal of US free-trade policy.

In February, the economic situation in Germany issued several wake-up calls:

Car sales have also been extremely disappointing, with dramatic drops in production shown below:

When analysed separately, the index of economic surprises, as published by Citi, gives the impression that the Eurozone economy has passed the bottom. Over the past three months, positive news has been outweighed on the economic front. However, the stance of the ECB and the latest inflation data suggest that it may be prudent to look for optimism elsewhere.

Germany’s strong dependence on trade with China, suggests that the economic rebound should follow the revival of production strength in China. Production PMI in China, which unexpectedly entered the expansion zone (above 50 points) had a positive impact on expectations but, a single report is not enough to conclude that there is emerging growth momentum. This kind of assumption should be priced immediately in the markets.

Risk Warning: Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.


Tickmill Representative
Lagging” ADP calculation could underestimate actual jobs growth
Non-farm Payrolls probably rebounded in March, making up for a murky February reading. Back in February the reading hit a 17-month low, with only 20K jobs added. Usually the start of spring supports activity in construction while manufacturing PMIs signaled about continuing revival in production sector.

The pace of construction spending accelerated in first two months of 2019 – by 2.5% in January and by 1.0% in February. The positive NFP report should shift the balance of arguments in favor of a transitory slowdown in the economy, which the Fed still has faith in. This will certainly underpin hopes that the US Central Bank won’t step into the ECB shoes as US policymakers attempt to maintain neutral tone of the comments. In doing so, the Fed would basically be acknowledging that the ECB’s early tightening was a mistake.

However, the US jobs market is unlikely to repeat the feat of last year. Coming at the height of fiscal stimulus, while firms face increasingly strained labor shortages and tightened credit conditions that constrain capital spending.

The rise in jobs is expected at 180K in March, while unemployment probably nudged higher, to 3.8%. These number are the median estimate of experts polled by Reuters. Some attention should be paid to the revised February reading, which should additionally smooth concerns over the slack in the labor market.

It is likely that the economy has moved to a lower gear because of the damping effect of the tax reform, which apparently could not ensure much desired “self-sustained” growth. The decline in trade due to the rivalry of Beijing and Washington for technological leadership, as well as a slowdown in foreign demand, stoked concerns that longest streak of economic expansion may be soon brought to the close.

In the first quarter it is expected that the economy will grow by 1.4% – 2.1% in annual terms. The fourth quarter GDP was revised from 2.6% to 2.2% due to a sharp decline in retail sales, which is one of the main components of consumption. In turn accounting for almost 70% of the aggregate demand.

The ADP report released on Thursday, estimated job growth in March at 129K, somewhat limiting optimism about today’s report. On the other hand, the ADP calculation model includes data from past months, as well as information about jobs coming not directly from companies. So, the February slowdown could have affected the March indicator. Econometric studies show that the official data was lower than the ADP when temperatures in the first two months were below seasonal norms. However, with improved weather, the Ministry of Labour often exceeded their estimate the ADP reading. It is difficult to accept the assumption that the ADP data for March caught a real weakness of the labor market, especially in light of more than encouraging figures on the initial jobless claims for March:

The chart shows that in February, the increase in jobs (by 20K) was also accompanied by the persistent rise of jobless claims data, beyond initial estimates. Unemployment claims were in a downward trend in March, helping markets to price in positive reading of the NFP.


Tickmill Representative
Side effects of negative rates as a primary short-term concern for the ECB
After just one month, the ECB made a seemingly significant retreat in credit tightening policy, calling off the rate hike and announcing the extension of the TLTRO program. With fresh signals of a slowdown in the economy and a jittery bond market, is there a requirement of new decisive actions from the Central Bank?

The ECB meeting on Wednesday is expected to become a kind of information bridge, with which the ECB will prepare the markets for new easing measures or measures combatting the side effects of the soft policy, to be announced at subsequent meetings. The composition of the policymakers voting on policy decisions is expected to be incomplete, as some of them will attend the spring IMF summit in Washington.

It’s difficult to believe that the economic and market challenges faced by the Central Bank are of a transient nature. As China gradually discovers excess production capacities due to lower global and domestic demand, in turn undermining medium-term Eurozone’s export outlook. Market rates (expressed through the yield of German government bonds) collapsed to the lowest level for two and a half years, resembling behavior seen in 2016, when recession fears were high. The ECB, even with a “dovish” wait-and-see attitude, potentially risks being overly optimistic and losing sustainable growth trajectory again.

Accordingly, with the need to keep interest rates low for a longer time, some analysts believe that the ECB should focus on side effects of the policy, primarily profits of the banking system. Comments on TLTRO and rates tiering from the ECB, could serve as confirmation of such intentions. In addition to the added value of the measures to reduce banking costs from negative interest rate policy, the ECB seems to conclude that the “symptomatic treatment” is the smartest step they forward. In other words, no major changes in monetary policy are expected in the near future.

Recent statements by policymakers, as well as the last meeting’s minutes concerning the introduction of rates tiering on excess reserves, suggest that Draghi may divulge more information this Wednesday. If the head of the ECB confirms that cashback for banks is on its way into the policy decision, it could have a negative effect on the euro. Since it will mean extending the era of low interest rates for an even longer period.

However, not all officials see the need for supporting the banks. The head of Danish Central Bank, Klaas Knot, commented that he has not yet got the evidence that negative rates harm lending in the real economy. ECB Vice President, Guindos, recommended banks work on their lending policies to figure out solutions for the shrinking interest margin.

As for TLTRO, the market will be interested in the size of interest rate and allowed use of funds. The minutes of the March meeting did not provide the necessary details about this step, except those that have been common knowledge since the last meeting: loans have a two-year maturity and they will be issued on quarterly basis from September 2019 to March 2021. The updates about TLTRO could cause a lively reaction in the shares of the banking sector with the impact on the common currency limited, as bank support is already known information.

Positive information that could allow the ECB to take a more pronounced neutral stance are: an increase in manufacturing activity in China this March, as well as a spring revival in the services sector in the Eurozone (accounting for almost 70% of GDP). The seasonal boost in consumer spending, associated with Easter, may have a deferred effect on inflation this year, as the celebration is scheduled for April 21 (compared to April 1 in 2018). This fact should also be taken into account when digesting the latest Eurozone inflation reading, according to which consumer prices, excluding volatile goods, rose by only 1% in annual terms.

Risk Warning: Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.


Tickmill Representative
ECB acclimatizes to decision-making in perpetual gloom
Whichever perspective the ECB chooses to evaluate the EU economy with, the resulting estimates lie in the range of “negative” to “neutral”, virtually ruling out a bullish surprise at today’s meeting.

  • Trump opened a new front in the trade war, this time attacking Europe for its unfair Airbus subsidies.
  • The Italian government had to say goodbye to hopes for economic growth this year as shown by government forecasts.
  • The British Parliament is stuck in growing dissent, leaving the Brexit denouement as uncertain as it was after the referendum in 2016.
  • In addition, the IMF once again cut global growth forecasts on Tuesday, which as a result increases the risks of external demand for export-dependent EU economies.
Like last time, the ECB is likely to characterize the risks as skewed to the downside. It will no longer work as though it’s giving a fresh wake-up call. Instead mentioning the reasons that will provide more information about the dynamic assessment of some ongoing processes in the economy, as well as abroad. This may shed some light on what the ECB thinks about changes in corporate expectations, or the trend for decline in trade with its main partners, i.e. China and the United States. A welcomed communication from the ECB would be the evaluation of the tariff threat from the US (for example, “external risks increased”), as the regulator can’t implement policy decisions while isolating foreign trade.

Shifts in policy are not expected at today’s meeting, as officials are mulling over the program for offering new loans to the banking sector (TLTRO) and are seeking ways to protect the profit of the banking sector. Nevertheless, warnings about the risks to growth and inflation may take on gloomier tone. The economy is facing increasing difficulties and complacency would be an unreasonably bold step. In order to prepare the markets for possible easing measures, the communication policy must also be built correctly, especially in light of the clear bearish bias of both TLTRO and compensation to banks on their interest on for excess reserves.

Although US tariffs still remain a distant threat, their emergence should definitely reflect on corporate sentiment, which could potentially delay economic recovery. The Eurozone is one of the weak points in the global economy, in part due to Italy, which is in recession and Germany unsuccessfully trying to reinvigorate activity in the manufacturing sector:

Source: Bloomberg

The IMF cut its forecast for global economic growth from 3.5% to 3.3%, as shown in updated data released on Tuesday. A decline in the first half of the year is expected to change to a pickup in the second.

The head of the ECB, Draghi, will need to somehow respond to growing rumors about the intention of the Central Bank to support profits of the banking sector. The measure could work as a “progressive taxation” of excess reserves, which commercial banks park in the ECB. Negative rates force commercial banks to pay the ECB for the reserves. Reimbursement of these costs could help banks, in the situation of shrinking net interest income, which creates an incentive for excessive risk taking:

Source: Bloomberg

Draghi may refrain from commenting, in the light of statements by Klaas Knot, the head of the Danish Central Bank, who urged his colleagues to abandon the discussion of this measure due to difficulties in its implementation.

The disorderly withdrawal of Britain from the European Union remains one of the main threats to economic growth, weighing heavily on corporate and consumer sentiments. This is understood by all 27 countries of the bloc, however, there is still no consensus on the mechanics of the exit. Today the leaders of European Union will meet again to discuss possible solutions, which should satisfy both sides, as well as UK political forces.

Risk Warning: Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.


Tickmill Representative
No trace of “trade truce” in Chinese exports data
The growth of Chinese exports in March offset decline in the first two months thanks to a combination of political, seasonal and economic factors. However, this recipe was useless to support imports, which is led by a prolonged decline in domestic consumption due to a fall in consumer confidence in China.

Exports in RMB increased by 21.3% YoY against 6.3%, effectively putting an end to anxiety after consistent decline by 1.4% and 16.6% in the first two months. The share of exports in China’s GDP has been steadily declining from a peak of 36.05% in 2006 to 19.75% in 2019. However, as can be seen, the composition of GDP remains highly vulnerable to fluctuations in foreign demand. For comparison, in the United States, the share of exports is about 12% of GDP.

The rebound of exports into positive territory reinforces the conviction that the slowdown in the first two months was a fall in trade after the “tariff rush” in 3Q and 4Q of 2018, the Lunar New Year celebration, as well as the gradual effect of the Central Bank and the government’s measures to maintain economic activity and their postponed impact behavioral benchmarks such as corporate confidence. The Chinese Central Bank urged that economic indicators be viewed not as separate readings, but in a trend, in order to get a correct idea of the causes of individual episodes of a short-term recession. As you can see, such a call was not unreasonable, although it was difficult not to succumb to the temptation to add disastrous exports on an already existing series of negative readings from China and rest of the world.

It is important to note that the progress in trade negotiations has stimulated exports from a completely non-obvious side – the strengthening of trade relations with the second largest trading partner – the EU. This can be perceived as a compensatory effect of US pressure on its main trading partners, who had no choice but to unite. During the period January-March 2019, imports from the United States fell by 28.3% in China, while exports fell by 3.7%, despite the fact that in December Trump and Xi concluded “non-aggression pact” for three months and for those three months the trade teams were busy talking up the expectations, declaring “fruitful “and “constructive” talks progress. It is difficult to consider such a decline in trade the result of a truce. However, in trade with the EU over the same period, China exported 14.4% more than during the same period last year, while imports grew by 7.3%:

The yield on 10-year Chinese government bonds rose on a positive report to 3.32%, the highest level for this year. Bond futures declined for the first time in three days. All this suggests that traders are pricing in increase in risk appetite and the effect of monetary easing measures.

Given the export price inflation, which probably remained at elevated levels after a 6.2% increase in February, real export growth in March could turn out to be more moderate. In addition, the rebound after the Lunar New Year will have to go into stabilization, so the effect of data on market expectations will be very limited.


Tickmill Representative
What the new Brexit delay means for UK manufacturers?
Capital spending and exports, the engines that drive the growth of British economy, entered lower gear due to weakening foreign demand and dragging uncertainty of Brexit. In these conditions, the economy begins to rely more and more on the main driver – consumption, which in turn depends on wage growth and consumer optimism – the channels through which shocks of aggregate demand enter the economy.

The fifth largest economy in the world expanded by only 1.4% in 2018, which was the worst performance in 6 years and data for the first quarter of 2019 show that the trend for slowdown will stay in place. “A sense of urgency” left British politicians with a Brexit postponement until the end of October, which will likely resume tedious process of “dragging the rope” between politicians. Lack of clarity about the access to EU single market in future drags on capital spending of UK firms.

Consumer spending grew last year at the lowest rate since 2012. Part of the slump came from Pound devaluation after the referendum, which boost price growth and put pressure on wages, hitting purchasing power of households’ incomes in Britain.

As inflation was suppressed and wages rose, the negative gap between these two variables favoured consumption thus boosting consumer confidence which supported household spending. Consumer spending and the government purchases made the biggest contribution to the growth of aggregate demand in 2018, while the capital expenditures and net exports slowed the rise:

Normally, when expansion relies on household consumption, with muted action form other growth factors, it’s easy for the economy to lose momentum or to see how it changes sign: consumers are the last in turn to get and adjust to market signals, the only question is how soon this will happen. According to the head of the Bank of England Mark Carney, if the burden of expanding the economy lies on the shoulders of the consumer, we should start to “watch the clock.”

British firms have postponed plans to expand production since the announcement of the referendum in 2016. Now a negative outlook on investments is confirmed with a significant increase in inventories, as the companies are unlikely to expand without selling off the surplus. On the other hand, it can be preparations for a favourable Brexit outcome, in which companies will have access to a single market and will be able to support good level of sales. However, British firms will have to reduce production if Brexit drags on, in this case, a short-term surge in production activity observed now should be perceived as a “lull before a thunderstorm.”

The Bank of England for some time insisted on the need for a gradual increase in interest rates along with the emergence of certainty about leaving the UK from the EU. However, the fresh postponement is likely to force the Central Bank to repeat the mantra about patience again, especially in light of the deteriorating PMI from IHS / Markit, which to some extent well predicted monetary decisions:

This, in turn, means negative Pound outlook as a result of BoE monetary decisions since the odds of its consistent disappointment become higher.


Tickmill Representative
Chinese Economy’s “Good News” May Be Bad News for Stocks
The source of genuine fundamental improvements in the Chinese economy can only come from the manufacturing sector… At least this is the opinion of Chinese investors who bought stocks and ditched fixed-income securities during the last episode of rising manufacturing PMI:

Let me remind you that on March 29, the markets were updated with the closely-tracked China manufacturing PMI, which unexpectedly jumped into positive territory (above 50 points), markedly outstripping the estimate. In one of my previous articles, we explored that the magnitude of the PMI rebound is of less importance than the variation of rise, depending on the size of firms. The greatest increase in activity was observed in small enterprises most vulnerable to demand shocks and credit conditions:

This is a very promising shift in terms of the outlook for corporate optimism as its more volatile and sensitive to economic changes in small firms.

It’s also important that two key sub-indexes shifted to recovery: production volumes and new orders (a leading indicator).

The government linked the positive changes in production with the success of the targeted credit measures for enterprises that bolstered consumption and investment. Well, the episode of liquidity injection into the economy, to the tune of 4.6 trillion Yuan in January is not quite a targeted measure. However, in February the PBOC tried to move monetary aggregates back to normal, but yet again returned to expansion in March:

Given the size and position of the Chinese economy in the world, it’s easy to understand what’s now driving the global appetite for risky assets. Reliance stems from the PBOC’s assistance, with its sheer scale obviously supporting domestic production data.

The growth of divergence in the economic surprises of US and China is probably the direct result of the difference in the magnitude of monetary easing. More precisely, the Fed kind of took a break concerning this:

Data released on Wednesday indicated that the impulse in PMI developed in broad macroeconomic variables. Industrial production and retail sales exceeded expectations, while the government’s target variable – GDP, rose by 6.4% in the first quarter, compared with a forecast of 6.3%. At first sight, the forecast looks good, however it’s possible that the “impatient” PBOC is just waiting for the first signs of improvement in order to tighten control of the monetary supply.

Further to this, the first signs of a U-turn in monetary policy are already in full view. For example:

  • The widely expected decline in RRR in April was not realized.
  • The PBOC did not conduct open market operations for 18 days in a row.
  • The new medium-term lending facility decreased in size. As a result, overnight repo rates soared to a maximum of 4 years, indicating growing liquidity deficit.
It’s clear that, with the transition of the People’s Bank of China to a more offensive stance, the stock market will again be under pressure. Additionally, if the growth of Chinese economy again turns out to be not “self-sustained”, then new economic shocks overlapping the tightening policy may hit the asset prices much more painfully.