Global manufacturing PMI falls to 13-month low.

In January 2016, the global composite PMI (both manufacturing and services sectors), produced by J.P. Morgan and Markit, dropped to the lowest level since December 2014 at 52.5. It reflects that the global economic recovery could slow down.

So, what went wrong? With the benefit of hindsight, we can see that the global economy, and emerging markets (EM) in particular, have been caught in a vice between Chinese rebalancing and the tightening US dollar liquidity conditions. This realignment of the global economic and financial orderis forcing two closely related imbalances – that of commodity prices and EM corporate debt – to unwind, bringing global trade and industrial production down with it. Some numbers tell the sad tale. EM private debt has increased from 75% of GDP to 125% since 2009, the corporate debt share of GDP in EM is now higher than in the developed markets (DM), and non-bank dollar borrowing has increased to $3.3 trillion.

The EM still underperformed compared to advanced countries. For advanced nations, their output growth softened. The US all-industry output index showed the weakest growth in 27 months. The eurozone’s index slipped to a 4-month low. Japan and UK registered a low growth. Overall, there are worries whether the growth of advanced economies could be robust enough to strengthen the global economic recovery in the period of a slowdown in emerging market economies.

Advanced countries tend to adjust monetary policies after growing concerns over economic growth.

In the US, despite a further improvement in labor market with the jobless rate falling to an 8-year low of 4.9% in January and the stronger wage growth, some key indicators raised doubt about the sustainability of solid growth momentum. For example, non-farm payrolls rose by 151K, below the market forecast of 190K, and the ISM services in January grew at the slowest pace since February 2014. In addition, after a rout in asset markets, there are concerns over tightening financial conditions and risks from financial position of energy firms in the wake of oil prices slump. For the eurozone, even as the ECB continued to implement ultra-loose monetary policy, growth of private loans slowed to 0.3% in December from 0.7% in November. The unemployment rate fell only slightly and remained high at 10.4%.

As for Japan, given worries about economic slowdown and deflationary risk, the BOJ introduced the negative deposit rate for the first time. The deposit rate is now -0.1% on excess cash balances held by financial institutions at the central bank. The stimulus has been rebranded as “Quantitative and Qualitative Monetary Easing with a Negative Interest rate”. By lowering the entire yield curve, the BOJ feels more confident it can “achieve the price stability target of 2% at the earliest possible time”. There are expectations that the rate may fall to minus 1- 2% from the current -0.1%.

Even though those countries have continued to implement unprecedented monetary easing over the past several years, concerns about economic recovery recently emerged. Both Japan and the eurozone may need further monetary easing and the US normalization of monetary policy may be delayed.


The composite PMI (both manufacturing and services sectors) showed almost no growth at 50.1 in January, as growth of services sector was offset by a further contraction in manufacturing. In the banking sector, NPLs increased for 17 consecutive quarters with a 36% jump in 2015 to 1.95trn yuan. Meanwhile, the Chinese authorities attempted to prop up the economy such as liquidity injection and measures for property sector (e.g. a cut in minimum required mortgage down payment). There is a concern that China’s economic and financial risks could have significant effects on the whole world via financial and asset markets as well as international trade. Several Asian countries’ exports underperformed those of China. South Korea’s exports shrank at the deepest rate since mid-2009 by 18% in January while its authorities launched new stimulus measures to support the economy. Malaysia’s exports rose only 1.4% in December (vs 6.3% in November). Its central bank lowered the reserve requirement ratio for banks to 3.5% from 4.0%. Indonesia’s exports plunged by 17.7% in December. Its central bank cut the interest rate for the first time in 11 months in a bid to boost the economy which grew at the weakest pace in 6 years in 2015.


Renewed equity market volatility, driven primarily by losses in excess of 20% in China so far in 2016, central bank policy measures in systemically relevant economies, intensified stress and higher global risk aversion in core emerging markets beyond China, and the potential stabilization in crude oil prices (following a prolonged bearish phase in commodity prices) are the major focal points for the global foreign exchange markets early in the new calendar year.

Analysts of Jefferson Trust are bullish on the outlook for the US dollar (USD) through 2016. US growth prospects remain constructive, even if 2015 ended sluggishly and 2016 has started on a soft note. In recent years, US growth patterns have consistently picked up after disappointing first quarter (Q1) returns (+0.6% growth on average since 2010 for the first quarter, versus an average of a little less than 3% for the second, third and fourth quarters combined over the same period).

The euro zone/US policy divergence narrative remains alive and we maintain a bearish bias on the outlook for the EUR. A referendum on UK membership of the EU is a key risk on the horizon.

The Japanese yen (JPY) fell sharply in late January as the BOJ surprised markets by introducing negative interest rates for certain portions of bank reserves. The BOJ indicated that additional policy steps could be introduced in the future. The surprise easing should temper recent JPY gains and may force investors to seek other “safe havens” (like the USD, perhaps) in periods of market volatility.

Developing market currencies have struggled due to external and internal concerns amidst escalating geo -political tensions worldwide. The Chinese renminbi (CNY) has steadied after losing ground in early January. Chinese policymakers are trying to balance the need to ensure local money markets are amply supplied with liquidity with the desire to stabilize the equity market and keep offshore interest rates supported to stem speculative pressure on the yuan. The Russian ruble (RUB) has declined nearly 20% in the past three months, due mainly to weaker energy prices and the negative effect from economic sanctions.

Precious Metals

Gold prices are up more than 16% while silver prices rallied by more than 12% versus the US dollar. The main reasons that Jefferson Trust’s analysts can see behind this powerful move is weakness in the US dollar, downward adjustment in Fed rate hike expectations, and a further deterioration in investor sentiment. In addition, as more global central banks signal further monetary easing ahead, gold and other precious metal prices are supported as low-yielding investment assets. At the start of February, gold and silver prices took out their 200-day moving averages, a technical indicator. This is a strong signal of a change in trend. Indeed, we think that the unrest on financial markets will have a considerable impact on economic growth, central bank outlook and currency outlook. For gold and other precious metals this means an improvement in the overall price outlook.


After a bullish start to the year, the US dollar had a disappointing run last weeks, recording a 3% loss against the euro. The dollar index (which measures the value of the US dollar relative to a basket of foreign currencies) fell by 2.6% as traders unwound their bullish policy divergence bets against the dollar. This became more pronounced as consensus began to grow that the Fed’s interest rate hikes would take place at a slower pace than initially thought. The dollar was weighed down by comments from the New York Fed’s President William Dudley who emphasised that financial markets had tightened considerably since the Federal Open Market Committee meeting held in December. Furthermore, high frequency data highlighted downside risks to economic activity (see international section), leaving an overall bearish tone towards the dollar. The rand also regrettably depreciated against major currencies. While disappointing Chinese manufacturing data raised concerns about the adverse impact on SA’s economy, weak oil prices on Monday and Tuesday encouraged capital flight to safe-haven assets.

Oil in a global economy

U.S. crude futures dropped as much as 5% on Thursday, driving prices below $27 for the second time in recent weeks. It settled at $26.21, the lowest point since 2003. The steady decline is creating a widespread headache for financial markets. It’s causing energy companies’ profits to plunge, raising worries about the prospect of bankruptcies in the oil sector and spooking investors about global growth. In total, crude oil has plunged an incredible 75% from its June 2014 peak of almost $108.

Freed from sanctions, Iran ramped up its production to nearly 3 million barrels a day in January — an 80,000 increase from December. Iraqi output reached a record high of 4.35 million barrels a day in January, and shipments from Saudi Arabia have also increased.

Many have been hoping that low oil prices would boost oil demand. But the IEA, which monitors energy market trends for the world’s richest nations, is predicting a slowdown because of global economic headwinds.

Medium-term investment recommendation from Jefferson Trust:


Companies with a high payout ratio: High dividend shares / Buyback

  • Stability from a high current return and low market-sensitivity.
  • High profit distributors are mature, well-managed companies


High-yield bonds:

  • Solid economic fundamentals: high growth and low debt ratio
  • High coupon.
  • Undervalued currencies so that exchange gains can be made.


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