Australian dollar falls again on German recession

DXY rebounded Friday night as EUR was hammered:

AUD was down against DMs:

But wider EMs were pulverised:

Brent fell:

Gold held on:

Metals were hit:

Miners smashed:

EM stocks too:

Junk was OK:

Treasuries soared:

And bunds:

Aussie yields crashed to record lows across the long end:

And stocks shed 2%:

What went wrong was the German flash PMI shocked markets:

▪ Flash Germany PMI Composite Output Index(1) at 51.5 (52.8 in Feb). 69-month low.

▪ Flash Germany Services PMI Activity Index(2) at 54.9 (55.3 in Feb). 2-month low.

▪ Flash Germany Manufacturing PMI(3) at 44.7 (47.6 in Feb). 79-month low.

▪ Flash Germany Manufacturing Output Index(4) at 45.0 (47.9 in Feb). 79-month low.

New orders cratered signaling more pain ahead.

The problem is that, as we know, Germany is a good leading indicator for Chinese demand so such rapidly deteriorating conditions also clearly indicate that China’s stimulus remains half-arsed and global growth is slipping away right along with it.

MB remains of the view that a global recession (growth at 2% or so) remains a distinct risk for 2019, led lower by the feedback loops between Chinese deleveraging, the trade war and European growth.

The US is positively booming versus these two and that still sets us up for a weaker EUR which, by implication, means a stronger DXY. That makes Chinese stimulus all the more difficult as capital outflow to the US tightens credit and broader EMs are just road kill in the process.

US growth is still fine so there is nothing to end this dynamic. Only two things can do it. China must stimulate so aggressively that it saves Europe or the US must be dragged into the slump enough for the Fed to cut rates and sink DXY. The obvious channel for that is the stock market.

Bonds higher and AUD lower remain the plays.

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David Llewellyn-Smith is chief strategist at the MB Fund and MB Super which is long international equities and local bonds that will benefit from a weakening Australian economy and dollar so he is definitely talking his book.

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