The post title is a bit of a simplification but is the gist of the MS argument
MS note in (very) brief:
- Global growth has rolled over
- tariffs putting US corporates under pressure
- The IMF suggests that US import tariffs are mainly paid for by US companies, depressing their profit margins. Hence, it should not be surprising to see US capex plans being cut radically, which should soon translate into moderating labour market conditions.
- Financial conditions look set to tighten imminently as warning signals have been flashing intensively
- investors have woken up to the corporate balance sheet risk
- Earnings growth may come under additional pressure due to the trade tensions
OK, and so to Australia comments:
- Australia has been our 'canary in the coal mine' in terms of getting the timing right when addressing this theme. When global funding conditions tighten, local central banks of indebted economies will have to ease to mitigate contractionary effects. Prominent local market observers are now predicting the RBA will cut rates three times this year, turning AUD into the worst-performing G10 currency. Replace Australia's highly indebted household sector with ambitiously leveraged US corporates and we would find two economies with great similarities, especially in the case of their foreign funding dependency. The main difference is that the AUD TWI has lost 24% from its 2013 top while the USD TWI has gained 37% from its 2011 low.
That last line flags risks for the USD.
