Why Investors Need to Shift from Wall Street to This Growth Haven

A pretty upbeat week for stocks could end on a sour note thanks to our pals in Europe.

Just a day after a rally for Wall Street, Germany dimmed the lights on global growth with the worst manufacturing purchasing managers index numbers in nearly 7 years on Friday. The reaction was instant, with risky assets everywhere taking a hit and the yield on the 10-year German bond careened to zero.

“It’s unusual to see such a widespread response to a piece of data like this but we have to remember that this is not a domestic problem. Germany may be impacted in an disproportionate way because of the size of its manufacturing sector but the causes of the contraction are global,” Craig Erlam, senior market analyst with Oanda, told MarketWatch.

Here’s what Fed Chairman Jerome Powell had to say about the region at this week’s meeting: “In Europe…we see some weakening, but, again…we don’t see recession, and we do see positive growth still.”

How nervous should investors be? As BlackRock’s chief equity strategist Kate Moore told this column earlier in the week, it’s an area that U.S. investors want to watch closely, because a slowdown there will hit American companies with global operations.

So with the jury out on U.S. growth and Europe clearly in trouble, who should investors turn to? Our call of the day from Saxo Bank’s Steen Jakobsen advises investors to diversify beyond U.S. shores this year to that trade friend/foe China, which has been pushing hard to keep its own global engine from stalling.

Jakobsen told clients in a note that while a new highs for Wall Street may still be on the cards, investors should “slowly change overweight to China vs. U.S.” That’s largely because 2019 for China is shaping up to look like what much of 2018 was for America, when Wall Street were stocks powered by $1 trillion worth of tax-reform fueled buybacks, he says.

“China and its growth model now needs to share its burden of becoming an industrialized country, and it knows that only treating investors well will keep the capital flowing in 2019,” he said.

And as the Chinese government tells its 90 million domestic retail investors to boost allocation to stocks, those elsewhere such as in the U.S. will also need to boost that as capital markets are reweighted later this year.

Last word goes to Pimco, which also made some upbeat noises on China in a blog on its website Friday. With that country upping the ante on stimulus this year and a trade deal with the U.S. in the making, “there’s a good chance global growth will stabilize or even pick up moderately this year,” said the home to the world’s biggest bond fund.

“The slowdown of global growth over the past year despite massive fiscal stimulus in the U.S. and still-supportive monetary policies in the advanced economies illustrates that, more than ever, China is a key driver of the global cycle,” said Pimco.

The market

The Nasdaq COMP, Dow DJIA and S&P 500 SPX are off to a weaker start, catching a cold from Europe.

The euro EURUSD is down pretty sharply, driving up the dollar DXY while the pound GBPUSD inched higher after news the EU gave U.K. PM Theresa May a two-week extension on Brexit.

Gold US:GCU8 has been getting some bids, while crude US:CLU8 is down sharply.

Europe stocks SXXP are obviously down, while Asian equities had a mixed session, with no big moves.

The chart

Our chart of the day offers a look at the ripple effect of the weak Europe data this morning. Here’s the yield on German government’s 10-year bond TMBMKDE-10Y or the bund, dropping below 0% for the first time in two years. Yields fall as prices rise. Elsewhere, the 10-year Treasury note yield TMUBMUSD10Y has hit a fresh 15-month low at 2.490% this morning.

The buzz

Nike NKE is down after warning of slower growth ahead, while Tiffany TIF  is getting hit by disappointing results. Hibbett Sports HIBB is soaring as earnings blew out forecasts.

Calling all workers. Tesla TSLA CEO Elon Musk is trying to rally his troops to help deliver 30,000 new cars by end March. The electric-car maker has also rebooted its customer-referral program.

At a seemingly prime time for IPOs, with Levi LEVI off to a gangbuster start Thursday, Pinterest has sped up the timing of its own offering, say sources.

China’s Tencent 0700,  sees worst-ever 32% drop in quarterly profits, plans international rollout of videogames.

Garuda Indonesia becomes the first airline to publicly confirm plans to cancel an order for 49 BA,  37 MAX jets, involved in two deadline crashes in recent months.

Facebook FB, CEO Mark Zuckerberg looks increasingly lonely at the top.

The economy

To close out the week, we’ll get the flash Markit PMI for March, exiting home sales for February and the Federal budget deficit later.

Article and media were originally published by Barbara Kollmeyer and Aaron Hankin at marketwatch.com