Global manufacturing and trade continue to show signs of weakness. Last week's Japanese balance of trade in goods for January showed a deficit, versus expectations for a surplus. The fall was caused by a sharp decline in nominal exports. Those to China dropped 17.4% y/y and trade with Europe decelerated as well, but to a lesser extent. Understandably, markets jumped onto the favourable US-China news with both feet. There are some signs from the periphery, though, that real data is improving. The euro area February composite output was higher, but a worrying collapse in German activity actually contained a minor but real uptick. And French data indicated that the social tensions at the heart of the weakness might be ebbing. This would suggest that the Euro-Area PMI could stabilize.
That said, outside the EU core, signs of recovery offer scant grounds for optimism. The spectrum of Brexit-fuelled chaos weighs on overall sentiment. The uncertainty is highlighted by recent news of Prime Minister May's brinkmanship with the March 12th parliament vote and reports of EU chiefs drawing up a plan to delay Brexit until 2021. The ECB seems to understand that any planning needs to wait until EU-UK relations are settled, opting for now to limit planning on targeted longer-term refinancing operations (TLTRO). Interestingly, markets are catching on, with one-month EUR/GBP volatility climbing higher. We remain of the position that forecasting Brexit outcomes is futile and the play would be to go long on GBP volatility.
