If you talk to anyone following macroeconomics and ask them what changed in March, they will cite two seminal events that meaningfully changed the direction of markets: the March FOMC meeting and the speech Janet Yellen made at the Economic Club of New York.
If you probe a little further, you will hear a conspiracy theory about the global macro drivers behind these events. According to the conspiracy theorists, the G-20 finance ministers reached an accord in Shanghai behind closed doors to weaken the dollar, which was causing all types of trouble around the world. This accord has led to a lower dollar, a rebound in EM currencies and commodity prices, and a relief rally in global equities.
To be honest, I do not give much credence to this line of thinking. Nevertheless, we’ve seen a dramatic change in the market environment and in the tone of the Federal Reserve.
At the Federal Reserve, the internationalistas, led by Brainard, are getting traction, prompting Janet Yellen to play down the prospects of a rate rise this year. While this change in stance helps the market, another development is playing an even more important role: the unfolding Chinese fiscal and monetary stimulus.
Chinese Stimulus Driving Near-Term Recovery?
For all sorts of political and economic reasons, it is becoming clear that Chinese policy makers are providing coordinated fiscal monetary stimulus to their slowing economy. They have come up with all sorts of policy schemes, and the impact of their efforts is already showing in the incoming data: Electricity consumption is picking up, auto sales are better, Tier 1 property prices are hot again, and the trade picture is getting better. It’s worth noting that while the IMF revised the global growth outlook recently, China was the only country with a higher growth forecast.
If this trend persists, and I think it will, the outlook for global asset prices and many of the issues facing the global economy could improve meaningfully. Chinese and EM growth could prove surprisingly strong. That, in turn, could help increase commodity prices, increase Chinese reserves, and decrease the risks of yuan depreciation. Yes, the global growth rate is still low, and slowing to some extent. But the risks of a catastrophic blow up due to a strong dollar, Fed tightening, and Chinese slowdown and devaluation may soon fade.
At least for a few quarters.
While the Chinese debt bubble and over-investment continue to darken China’s long term economic prospects, a recovery in its growth outlook over the near term will be positive for global asset prices in general and EM assets in particular. The current rally in the markets may have some legs.
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