On the heels of a gloomy Q4 last year, U.S. investors have found a reason to cheer up thanks to solid economic data and a more forgiving Fed, which lifts emerging markets, too. Some Eurozone countries, however, give cause for concern.


1. U.S. investors have caught a whiff of the old goldilocks feeling, as the anxieties of recent months seem to be receding swiftly.

Investors could be forgiven for wondering what the fuss concerning the economic slowdown in the U.S. was all about. After several months of gloomy sentiment, exacerbated by worries about the recent government shutdown, a raft of positive economic data has lifted the clouds. In a sharp turn of events, job growth is exceeding expectations, without however threatening to cause excessive wage inflation, while industrial manufacturing has roared back, erasing the slump that so strongly upset financial markets in December. Lower gasoline prices have added to the feel-good mood, compounding the Fed’s reassuring new flexibility in deciding when to hike interest rates next time. While financial markets are far from exuberant, these developments brings back memories of 2017.

 

2. The Eurozone on the other hand is plagued by increasingly negative data, thus diverging from the U.S. economy.

The economic sentiment in the Eurozone could hardly be more different. The forward-looking PMI index for the manufacturing sector barely hovers above the threshold that separates expansion from contraction, while the latest retail sales figures for December show a decline. The European Commission has reacted by lowering its GDP growth forecast for the region in 2019 to 1.3%. What is concerning investors the most, however, is the risk that Germany may slip into a technical recession, defined as two consecutive quarters of negative GDP growth, after Italy has done so last week. Additionally, while Italy narrowly avoided a showdown with the EU over its budget deficit last year, now that growth is running below the government’s previous assumptions, the budget deficit is likely to exceed the level agreed with the EU. This would reopen last year’s dispute, unsettling the Eurozone’s bond markets. The timing of these developments is not ideal for the ECB, which finds its hands tied in the final eight months before a new President is appointed.

 

3. The Fed’s turn to a more dovish stance is a boon for Asian central banks that had been battling with USD appreciation last year.

The Fed’s climb down from its previously rather hawkish stance on monetary policy has resonated throughout Asia, as it instantly relieved central banks in the region from the spectre of continuing USD appreciation. The Reserve Bank of India has decided to cut its benchmark interest rate by 25 basis points to 6.25% this week, while the Bank of Thailand has refrained from an interest rate hike and the Indonesian Rupiah has partly reversed last year’s depreciation vs. the USD.

 

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