Nomura: Growth scare is priced into markets

Financial markets are in a holding period waiting for the next set of data points to confirm or deny the recovery thesis. Economic visibility remains low and investors lack the confidence necessary to fully embrace the next leg of the advance in equities, credit, emerging markets and carry trades. The clear and present danger for markets is an emerging growth scare, threatening to unravel the recent love affair with risk. The signals that are flashing yellow are:
Crude oil prices are declining
US and G10 Economic Surprise Indices are rolling over
MSCI BRIC relative to the World equity index has returned to the 2007 level and is now rolling over
The Baltic Dry Index, a proxy for global trade is turning lower.

Mr. Macro argues that the foundations of a sustainable economic recovery and a bull market in stocks are shaky. The US fiscal stimulus is not large enough to offset the hole in private demand. Following the short-term bounce based on this stimulus, the economy should lose momentum once again. The oil price, a barometer of growth expectations, is a warning sign of that possibility. The growth scare is echoed by weakness in economic surprise indices (US and G10), underperformance of BRIC equity markets relative to the world, and the Baltic Dry Index, a barometer of global trade. There are two major facets of the growth scare – weak US consumer fundamentals and a weaker demand for commodities from China.

The current market-moving theme is a growth scare, centred on the US consumer and Chinese demand for commodities. This supports long fixed income trades and is negative for risky assets. Mr. Macro is highly uncertain about the short-term tactics with most fixed income markets back at the highs and the SP500 and SX5E near the 200-day moving average. It is possible that markets lack the necessary momentum to aggressively discount the growth scare at this time and the recent moves could be reversed. Mr. Macro advises caution. This is not the place to add to fixed income longs or to sell equities. Wait for better entry levels.