Market volatility: It’s not the economy – Nomura

Analysts at Nomura argued that as tempting as it is to find explanations for the recent spate of market volatility in macro news-flow, they are not biting.  

Key Quotes:

“There is little evidence from incoming data to suggest the world economy is on the brink of a major slowdown phase.”

“Indeed the latest swathe of growth data has – on the whole – remained pretty firm and generally surprised expectations on the upside.”

“The incoming inflation data in the meantime have been well-behaved. Insofar as equity markets have typically tracked growth and inflation surprises quite closely in recent years, it’s reasonable to suggest that markets may have over-reacted relative at least to the fundamental news-flow.”

“There are however a few data points that are more concerning. Last week’s flash PMI surveys from the eurozone were very disappointing and that has found an echo in further evidence from some Asian economies to suggest that world trade growth is decelerating. This contrasts with other data from e.g. China, along with more forward-looking flash PMIs from Japan and the US that suggest trade growth is still holding up fairly well. It contrasts with nearly every data point moreover that suggests the US economy more specifically remains in rude health and is still reaping the benefits from very accommodative fiscal policy.”

 “We should expect the downside risks to growth elsewhere to climb. This is a near-inevitable consequence of a more mature phase of the (US) economic cycle, where fiscal largesse is combining with firming wage pressures and where monetary policy normalisation is removing the liquidity support to those economies that have hitherto been in great need of it (e.g. in EM).”

“The eurozone’s present fragility – as Mr Draghi argued at the ECB press conference last week – is in some respects a hangover from the burst of unexpected activity last year. But countries such as Germany that are running very large current account surpluses are also now being hit hard by heightened protectionism, by higher oil prices and possibly a deceleration in China’s domestic demand. And the absence of much monetary ammunition at, for example, the ECB to deal with these issues and growing market concerns at the ability of some countries (e.g. Italy) to deploy fiscal ammunition is a more understandable source of market volatility.”