Macroscope | Federal Reserve rates, China’s balancing act and Europe’s sluggishness all point to the global growth scare getting scarier in 2019

While it does not feel like it, the past fortnight has been kind to financial markets. A confluence of developments – comments by leading policymakers at the US Federal Reserve, which fuelled speculation that the pace of monetary tightening will slow next year, a temporary ceasefire in the US-China trade war and signs that Italy’s populist government is backing down in its fiscal battle with the European Commission – have put an end to the fierce, broad-based selling pressure that began in early October.

Since November 23, the MSCI Emerging Markets Index – a leading gauge of stocks in developing economies – has risen more than 3 per cent. Spreads on US corporate bonds, which widened sharply in October and in the first-half of November, have narrowed, helped by a tentative recovery in oil prices. What is more, the yuan has edged back from the psychologically important level of 7 versus the US dollar, increasing 1.8 per cent on Monday and Tuesday, its strongest two-day gain since July 2005.

Yet, to say that sentiment remains fragile would be an understatement. Just hours after Asian equity markets began rallying on Monday morning in response to the easing of trade tensions, the publication of a slew of weak data on manufacturing activity across the globe revealed the severity of a slowdown that is becoming the focal point of market anxiety.

A Purchasing Managers’ Index (PMI) survey produced by JPMorgan and IHS Markit showed that global manufacturing output last month remained at its weakest level in nearly two years. New export orders in emerging markets fell for the eighth straight month, mainly due to persistent declines in China, where manufacturing output is on the verge of contracting.

In the euro zone, manufacturing activity has collapsed this year after expanding at its fastest pace in two decades last December. The PMI survey for the bloc revealed that factory output last month fell to its weakest level since August 2016, with growth in Germany, Europe’s largest economy, dropping to a 2½-year low. IHS Markit notes that the downturn is “linked to trade wars [and] intensifying political uncertainty” in Europe. More ominously, it points out that business confidence in the euro zone has not been this gloomy since the sovereign debt crisis in 2012.