Hello and welcome to the Friday edition of Before and After, the twice weekly market show from Refinitive. As you know, our goal is to look at the possibilities around events that will shape the markets in ways both big and small. Today, we will discuss Japan’s machinery orders and the upcoming Spanish elections and we go back and look at the non manufacturing ISM for our after study. Let’s get right into it with Japan’s machinery orders. Arguably, the manufacturing slowdown that swept across the world started in the Far East when China put the brakes on its credit fueled growth. Now, clear signs of weakness have turned up in areas as far apart as Asia, Germany, and now even with the US manufacturing data. This weakness has investors concerned that this slowdown will turn into a full blown recession and yet in recent weeks, we’ve seen equity markets in some of the most affected places starting to rip higher. Germany, Taiwan and Japan and the US is making all time highs. Are Equity markets getting ahead of themselves or are they pricing in a turn that we haven’t yet seen in the data? Japan’s proximity to China and its heavy exposure to industry has counted against its economic well-being over the last year, and its quarterly GDP has been flirting with zero growth over the last few years. Not to mention merchandise export growth has been in negative territory throughout all of 2019. One of the key indicators of health of the manufacturing sector is the performance of Japan’s machinery orders. Last month, the year on year number hit its lowest level since 2014, the last time the global economy suffered a significant manufacturing slowdown, but, if global equity markets are right, shouldn’t this number be bouncing from these lows? The latest poll of economists is not exactly optimistic, forecasting a year on year decline of ten point eight percent. Yes, that would be an improvement on the previous month, but it would still be one of the ten worst readings since 2010, hardly indicative of a global manufacturing economy that’s made it through the worst. So what should we expect? Bond yields are unlikely to react as the Bank of Japan has that market all sewn up. Strong data should weaken the Japanese yen because if global growth is truly turning higher, then Japanese investors will take more overseas investment risk selling yen to buy foreign assets. Most of the action should therefore take place in the equity market. If the year on year number is another shocker and that’s got to be anything worse than the forecast of minus ten point eight per cent, then we’d be looking for profit taking on the Nikkei 225 which are Refinitive charts shows us has gained 15 % since the summer. If it’s worse than the previous month below -14.5%, then global investors should be reevaluating their newfound optimism. Anything above -4% and this could indicate that the global manufacturing sector is indeed attempting to reverse engines and that global equity indices have correctly predicted a bottom in the cycle of manufacturing weakness. Either way, this will be a key signpost on the way to understanding the health of global manufacturing. That’s what’s happening in Japan. What else is going on across the globe that might interest investors? This next before topic could certainly be seen as an after because for the fourth time in four years, Spain is heading back to the polls. On the heels of the no confidence vote in Prime Minister Mariano Rajoy, amidst a massive corruption scanda, Prime Minister Pedro Sanchez of the center left Spanish Workers Socialist Party was elected without a clear majority. Without cross-party support, he has failed to form a consensus government by the September 23 deadline. The severe jail terms recently handed out to Catalonian separatists, which has ignited unrest in the region, will add another layer of tension. There is the distinct possibility that Sanchez joins Italy’s Matteo Renzi and the UK David Cameron in falling to another populist backlash. European elections are seemingly the EU’s ever present banana skin. European leaders probably don’t mind another hung parliament, but they would cringe at the thought of another European bastion of eurozone conformity falling into the hands of a populist party. Very few expect that there will be an outright victor. Most expect there will be a coalition. But the question is, will it be left leaning or will it be right leaning? And how populist will it be? Spain is heading to the polls with home sales that are on the slide and an economy that is slowing. Here are the market instruments we should be paying attention to. In Spain. Spanish 10 year bond yields and Banco Santander is common stock are a good place to start. Yields have been compressing on the back of the global bull market in bonds, with Spain’s 10 year recently reaching their lowest level ever. Look at our Refinitive chart. We see that Santander is one of the largest members of the IBEX 35 and of course, Spain’s biggest and most important bank. Santander stock is hovering near its 20 year lows and in constant jeopardy of plummeting through support. Down 6 percent on the year. It’s the real reason why Spain’s IBEX is only up 10 percent and lagging the other European major indices in 2019. An outright, though unlikely victory with either the Socialists or the conservative Popular Party would provide some relief for Spanish assets. The IBEX should outperform Europe on that outcome. After all, it does have a lot of catching up to do. Most likely is that a coalition will need to be formed with one of the other main parties, the center leaning Cuidadanos, the socialist Podemos or the right wing VOX party. The risks are that the populist, far right or far left leaning parties gain a much stronger hand. The European project has come under fire from populists and this could unsettle the bond market and bank stocks. Remember what happened in Italy when election uncertainty picked up? Italian bond yields had a nasty spike in the middle of 2018, and a repeat in Spain would hurt the bank stock too, with repercussions across the eurozone banking sector that has recently been enjoying a rally. Of course, there’s always a decent chance that this election again fails to break the deadlock that would leave Spanish assets, treading water and looking for a life preserver in the form of external influences to decide their direction. Ultimately, the big hope for markets is that a clear victor emerges because that delivers certainty regardless of political persuasion. Time to look back at the non manufacturing ISM and see what we can learn from what happened after the market reacted. We theorized that a rapid rebound from the previous month lows should see risk assets head off to the races. Confirmation of a slowdown would lead to worrie, but then again, the expectation of even more accommodation from the US Central Bank. Good news, it looks as though the economy is not collapsing after all. Non manufacturing ISM came in stronger at 54.7 versus an expectation of 53.5. This was a decent rebound from the three year low. This gave the market a slight pop before ultimately giving up on those gains. Given this was a beat, maybe market participants are not nearly so worried about the slowdown, as many headlines would have us believe. In fact, it looks like the case for a robust economy has been properly valued. After last week’s very strong payrolls. Again, it’s going to be difficult to get a strong risk on bid with equities at all time highs, even with very solid numbers going forward. It may even be that from this point on good data is bad news because it will price out the likelihood of further rate cuts in the US. As we all know, global equities love rate cuts and liquidity injections more than they love economic growth. And remember, the US has not fallen into recession in the last 20 years when this data point has been above 50. That’s it for this episode of Before and After the twice weekly market show from Refinitive. I’m Jamie McDonald. Be sure to like subscribe and hit the bell for notifications and I’ll be back on Tuesday.