In the past three months, China together with most of the countries beaten by President Trump and his team of tariff specialists have outperformed the US stock market by at least 100 basis points. This includes the stock market of the mainland known as A shares, which was defeated this year because of the trade war. Adding insult to injury, investors are getting rid of their US stocks and bonds, and China sees money flowing. Equity and bond funds had cash outflows of more than $ 8 billion, much of which is in line with the pattern that has been in place since the middle of the year, said Global EPFR Tracking firm based in Cambridge, Massachusetts. As a result, in the United States, fixed income investors are increasingly beginning to dispose of fund groups that they fear will have liquidity problems if markets turn sour and become short-term fixed income funds in many Asian countries, but mainly in China.
Retail flows in this group of US equity mutual funds were negative for the 76th consecutive week. It is quite possible that this fund group will end 2018 without a single week in which retail flows have been positive. Last week, Chinese equity funds raised $ 1.58 billion in new money. The United States recorded net outflows of $ 4.4 billion. The story here is that people gravitate around markets that are based on some kind of state.
China is calm on the credit side, unlike the Fed. The Fed raised rates as expected recently, as a countermeasure. However, Chairman Jerome Powell’s comments on two more rate hikes next year have scared the market. Investors want a more accommodating tone from the Fed before making punting on the markets or making any further decisions. Market expectations are that quarterly GDP figures reach about 3.5%. Orders for durable goods should also be strong, up 0.3% from 0.2% in the previous quarter. The weakness of this data could give investors the feeling that the Fed could pause at its next monetary policy meeting in March.
Bleak Forecast for US Stock Markets
US stock markets peaked at the end of January this year, as investors began to understand the impact of tariffs on the macroeconomy. Most economic analyzers have minimized the effects of the trade war in the United States, with many economic models predicting a half-percentage point contraction in the case of a generalized trade war. At the same time, the tightening of the Fed has raised concerns about a dollar liquidity shortage that would have affected many emerging markets across the globe. The MSCI Emerging Markets Index has spent much of 2018 in a continuing downward trend. Only some countries outperformed, notably Brazil, which continues to record portfolio inflows. If the trade dispute is resolved within the 90-day ceasefire period, the market will recover.
Although this is more likely to impact China, as it is the market most affected by tariffs and any signs of support of the country is an indication of the support of economic weakness. The United States is doing the opposite, with the Fed willing to at least exploit the ruptures of the economy and threaten the formidable job market. The trade war and the Feds have turned out to be dampening risk for the global economy.
Major exporting economies, Germany and Japan, recorded negative GDP growth in the third quarter. European equities are in worse shape than US equities, for sure. China may be getting more money into its stock market than the United States, but investors are wasting money, at least in the short term. China is on the verge of a difficult landing, according to Neil MacKinnon, an economist at VTB Capital. The Shanghai Composite Index is in bearish territory despite some monetary and fiscal easing by the central bank.