Global business cycle turning around – Danske Bank

Analysts at Danske Bank feel that there are rising signs of a turn in the global business cycle as the Chinese Caixin PMI for March dropped more than expected to 51.0 (consensus 51.7) from 51.6 in February.

Key Quotes

“PMIs for other Asian countries were also softer in March and the US ISM index released yesterday dropped more than expected to 59.3 (consensus 59.6) from 60.8 in February. Overnight the Japanese Tankan survey for Q1 showed a similar picture of moderation in the business cycle, which has also been evident from a move lower in the Japanese PMI in recent months.”

“While the PMI data generally still point to robust growth, there are clear signs the global cycle is now decelerating. This normally causes more volatility in risk assets and provides support to core fixed income markets. We still expect equity markets to outperform bonds on a 12-month horizon but we are likely to see continued high volatility in the months to come. We also do not expect the next leg up in bond yields until 2019.”

“On the trade front things may have to get worse before it gets better. The coming announcement from Trump on tariffs on Chinese goods will likely trigger a retaliation from China that may involve tariffs on US soybeans and aircraft, taking the trade worries a notch higher. We expect the trade tensions to calm down after that as negotiations unfold and no more measures are taken. However, until then the markets may worry over a further escalation.”