There are growing signs that the global economy may be headed towards a slowdown after a record decade of growth. On January 21, the International Monetary Fund (IMF) cut its global economic growth forecasts for 2019 and 2020, cutting weakness in Europe and several emerging markets. The global lender also suggested that Sino-U.S. trade tensions and Brexit concerns could further destabilize the financial markets.
Let’s take a look at where the global slowdown is occurring and what it means for active traders over the coming weeks and months.
China & Emerging Markets Sell Off
China’s economy grew just 6.4% during the fourth quarter, which was its weakest quarterly growth rate since the 2008 financial crisis. While Beijing has been projecting slower growth for several years—as part of its shift from quantity of growth to quality of growth, the slowdown is starting to catch up with the rest of the world. The Sino-U.S. trade war has also taken a toll on many industries that rely on Chinese exports or consumers.
The most visible sign of China’s growing impact on domestic equities is Apple Inc.’s (AAPL) first-quarter earnings warning earlier this year. The company cut first-quarter guidance from $89 to $93 billion to $84 billion, citing lower-than-expected iPhone revenue, especially in China. Many other companies have followed suit with similar warnings, including Caterpillar Inc. (CAT) and NVIDIA Corp. (NVDA) this week—both blaming weakness on China.
Other emerging markets are also experiencing a slowdown in economic growth thanks to external conditions. In addition to trade tensions, rising U.S. interest rates and dollar appreciation have made paying dollar-denominated debts more difficult. Volatile commodity prices have also taken a toll on emerging market economies that rely on crude oil exports, including many Middle Eastern and Latin American economies.
Europe Slows Down, Japan Steadies
Europe’s slowdown stems more from internal political risk than external factors. New fuel standards for automobiles are taking a toll on Germany’s export-driven economy; Italy is under pressure from its budget standoff with the European Union; and, Britain’s Brexit plans are still in disarray. The IMF projects that these factors will moderate eurozone growth from 1.8% in 2018 to 1.6% in 2019, which is a 0.3% cut compared to its projections just three months ago.
Germany remains one of the biggest concerns across Europe. Last quarter, the powerhouse economy reported just 1.5% GDP growth, marking its slowest growth since 2013. A survey of German business executives showed a fifth consecutive month of declining morale, suggesting that pessimism has hit levels that haven’t been seen since 2012. The European Central Bank’s Mario Draghi cited Germany’s economic shock as a major reason for eurozone fears.
While Europe and emerging markets continue to struggle, Japan has remained a bright spot in the global economy. The IMF revised its forecasts for economic growth higher by 0.2% to 1.1% in 2019, saying that government spending measures designed to offset a scheduled sales-tax hike in October could contribute to strong growth. However, the country must carry out structural reforms in order to make the growth more permanent.
Opportunities for Traders
The good news for bulls is that the odds of a recession remain lows in most regions of the world, despite the slowdown in economic growth and potentially disruptive events. If political risks are resolved and growth resumes, traders could see a bounce in affected economies and equities. Many tech companies, for example, believe that the fourth-quarter slowdown in China-sourced orders is temporary and that long-term growth remains intact.
For example, NVIDIA more than halved over the past since October and currently trades at levels that haven’t been seen since 2017. Long-term relative strength index (RSI) readings show that the stock is nearing oversold levels, which could create an opportunity for short-term traders to look for a rebound after the lower guidance is fully digested. The opportunities may exist in other companies that have been affected by China’s slowdown.
On the other hand, short-sellers have an opportunity to profit from the growing fear, uncertainty, and doubt in at-risk economies. The United Kingdom iShares MSCI ETF (EWU) and other UK-focused ETFs could become very active in the event of a “no-deal” Brexit and emerging market ETFs, such as the iShares Emerging Markets ETF (EEM), could present short opportunities if U.S. interest rates and dollar strength continue.
The Bottom Line
There are growing signs that the global economy could be heading for a slowdown over the coming years. While recessions are still unlikely at this point, the sell-off could present opportunities for both long and short traders. The rising political risks in Europe and the trade war with the U.S. could also create catalysts for significant volatility over the coming months.