By Michael O’Neill
Global financial markets have been somewhat subdued this week. That’s because Chinese markets close for New Year celebrations starting February 4 and stay that way until February 10. 2019 is the Year of the Pig, and in Chinese culture, pigs are the symbol of wealth. A pig may be a symbol of wealth, but it doesn’t make any distinction between an increase or a decrease in one’s fortunes. And that is something worth noting.
The Year of the Pig last occurred twelve years ago. Financial markets started crumbling in 2007, precipitating the Global Financial Crisis of 2008/09 and a four-year recession. To say it was nasty is an understatement. To say it won’t happen again is naïve.
There are similarities to 2007 and today. The Dow Jones Industrial Average peaked at 12,786 on February 20, 2007 followed by a nasty correction and a then a rebound to a new high in October. In April of 2007, New Century, once the largest independent broker of subprime mortgages declared bankruptcy. (See Wolf of Wall Street) In May, the Organization for Economic Cooperation and Development (OECD) wrote: “The US financial system is well capitalized and flexible enough to absorb the credit losses from the sub-prime fallout.” They also said the Fed’s decision to leave interest rates unchanged (at 5.25%) contributed to the stock market rebound as did a lack of fresh signs of inflationary pressure. We know how that worked out.
Chart: DJIA highlighting 2007 and 2008
Source: Yahoo Finance
The 2019 Year of the Pig has just begun. Wall Street’s bull market is over nine years old and showing signs the matador is performing the “Tercio de Muerte.” Wall Street more than recovered from its year-end swoon aided by the Fed’s decision to pause rate hikes and revert to a dovish outlook. The US Congress is divided. Republican’s control the Senate, Democrats control the House, and no one controls President Trump. Even the Oscar’s can’t find a host for the 2019 Academy Awards. Various institutions have downgraded global economic growth forecasts. China’s economy is slowing, in part because of US tariffs. The US economy has issues as well. A recent CNBC Fed survey put the odds for a recession at 26%.
Canada isn’t sitting pretty, either. Canada is still subject to tariffs on steel and aluminum exports to the US despite agreeing to terms in the United States Mexico Canada Agreement on trade. That deal still needs to be ratified by the US Congress, which will be no small feat. The economy is vulnerable to prolonged oil price weakness exacerbated by a lack of pipeline capacity to ship land-locked Alberta crude to markets. Even worse, the Canadian government paid Kinder Morgan $4.5 billion for a $3.5 billion pipeline they can’t get built, adding to the mounting Federal deficit of 19.6 billion. Canada’s relationship with China deteriorated dramatically with the arrest of the CFO of Huawei, at the behest of the USA. An ill-advised tweet by Minister of Foreign Affairs Chrystia Freeland supporting jailed Saudi Arabian activists sparked a diplomatic kerfuffle between Canada and the Kingdom. That could jeopardize a $15.0 billion armoured car contract leaving taxpayers on the hook for losses.
And it is not “sunshine and unicorn’s elsewhere. Great Britain in the throes of an economic death spiral thanks to the British governments’ complete and total bungling of the Brexit file. The UK is within fifty-days of crashing out of the European Union without an exit deal. If so, British goods would be subject to EU tariffs and some products could need to pass a certification process. It could spark a mass exodus of businesses relocating to one of the EU27 nations. It could be devastating to the financial industry home as UK Clearing Houses handle the bulk of Europe’s $858 trillion swaps and derivatives clearing business. Fortunately, EU officials are aware of the risks for financial market chaos and will grant “temporary” access.
That chill in the air is not just from a polar vortex. President Trump and President Vladimir Putin have brought back the “Cold War.” Trump pulled the US out of the Intermediate-Range Nuclear Forces Treaty, that was signed in 1987. That treaty removed all land-based ballistic and cruise missiles within range of European capitals. Russia responded by announcing plans to develop new land-based missiles. The Americans are holding peace talks with the Taliban, planning to withdraw troops from Afghanistan and getting ready to declare victory over ISIS in Syria. China is still using Navy and coastguard ships to claim disputed waters in the South China Sea and previously reinforced their claims to contested islands by installing cruise missile bases. What could go wrong?
Fortunately, there is unity, at least in G-10 Central Bank land. The Bank of Canada (BoC) led the Fed, European Central Bank, (ECB) Reserve Bank of Australia (RBA) and the Bank of England (BoE) in an abrupt about-face from a tightening bias to a dovish outlook. On February 7, the BoE blamed slowing economic growth and on target inflation for its policy shift. The RBA acknowledged a soft housing market, downgraded growth forecasts for 2019 and warned that interest rates could go lower.
The 2007 Year of the Pig set the stage for the financial catastrophe of 2008/2009. Will history repeat? That may be why the major central banks are all preaching from the same prayer book, fully aware of the Pig’s relationship with wealth.