You really didn’t need any survey data to know that market participants currently harbor a decidedly dour outlook on the prospects for global growth.
Rather, all you need to do is look at bond yields and inflation expectations which, in the euroarea, collapsed to record lows this week, much to the chagrin of the ECB.
(Bloomberg, 5y5y inflation)
But, just in case you weren’t convinced about just how negative everyone really is, the latest edition of BofA’s closely-watched global fund manager survey drives the point home in dramatic fashion.
“Global growth expectations plunged by the largest amount since the November 1994 FMS [during] the Tequila crisis”, the bank’s Michael Hartnett writes, with some alarm. Specifically, BofA notes that “FMS growth expectations collapsed by a record 46ppt MoM to a net 50% FMS investors expecting global growth to weaken over the next 12 months.”
(BofA)
And it gets better (or, more aptly, “worse”) the more you read. For instance, 87% of FMS respondents now say the global economy is late cycle. That, folks, is the highest reading ever.
(BofA)
Unsurprisingly, both short- and long-term interest rate expectations have simply “collapsed”, as Hartnett puts it (“collapsed” is a word that’s coming up a lot lately, with regard to everything but stock prices). On a granular level, 32% of survey respondents expect short-term rates to drop over the next 12 months, while a mere 10% see long-term interest rates rising.
(BofA)
“89% expected higher short-term yields and 63% expected higher long-term yields, respectively, as recently as November”, Hartnett marvels.
Needless to say, the trade escalations have played a part in the rapid deterioration in sentiment. As Nomura put it on Tuesday morning, the “market is priced for worst-case outcomes in Global Growth-, Global Inflation- and Tariffs.”
Although this is quickly becoming a tired joke, one certainly hopes there is, in fact, a method to Donald Trump’s madness when it comes to pushing the protectionism envelope. Because while his policies are not the root cause of everything that ails the global economy, the trade war is most assuredly not helping.
And, as indicated by a veritable procession of lackluster reads on key indicators (with the most recent being Empire State manufacturing on Monday), the US economy is no longer immune.
Yeah, bonds may be priced for worst case outcome, but equities sure as hell are not. I don’t think a protracted trade conflict and global slowdown is remotely priced into US equities. The BoA survey just serves to drive the point home – most of the market believes we are late cycle and sell the rally will be the theme of the next month. Way I see it, even if a China trade truce is ironed out, there’s maybe 5% upside, and 2-3x the downside if not. Lagging economic indicators are already quantifying the slowdown and it will only get worse.