(Bloomberg Opinion) -- An economic slowdown in China is the biggest risk facing markets, according to Bank of America’s monthly investor survey. So it should be good news that the most recent data indicate the Asian nation’s economy is perking up. The problem, as seen in the performance of global stocks Monday, is that the economy may be rebounding a bit too strongly, leading the People’s Bank of China to pull back on its latest stimulus measures.

The PBOC admitted as much late Monday local time, saying it will keep good control of the money supply “floodgate” and not “flood” the economy with excessive liquidity as the economy improves. For many market participants, the announcement was a chief reason stocks struggled, with those in the U.S. falling. This year’s stunning rebound in equities and other riskier assets can be tied directly to the dovish pivot by the Federal Reserve and other top central banks. A custom index measuring M2 figures for 12 major economies including the U.S., China, the euro zone and Japan shows their aggregate money supply has risen by $1.63 trillion this year to $74.7 trillion in April. That contrasts with a decline of $3.31 trillion between April and October of 2018, a tightening of liquidity that contributed to the big sell-off at the end of last year. This just serves to underscore how markets continue to be dependent on central bank largess. A decade after the financial crisis, “they are still here and still dominating and controlling all of the markets with the money they created out of thin air and then parceled out, in various manners, to the marketplace,” Mark Grant, the chief global strategist at B. Riley FBR, wrote in a research note Monday. “To put it another way, before 2008/2009 they were ‘part of the Game.’ Now, they ‘are the Game’ and no institution on Earth has the financial capacity to compete with them.”

The upside is that despite the rally in equities, animal spirits are quite muted. At a recent reading of 71.3, State Street’s monthly index of investor confidence is holding around its all-time low. To put that number in context, the index only got as low as about 82 during the financial crisis and was above 100 — the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets — as recently as last summer. The measure has authority because unlike survey-based gauges, it’s based on actual trades and covers 15 percent of the world’s tradeable assets.

STOCKS ARE LOOKING AHEADEarnings season kicks into high gear this week, which means that we’ll start to find out whether investors really are content with zero percent profit growth for now on the expectation that corporate executives will provide an optimistic outlook for the second half of the year. Plus, the glass-half-full crew will point out that flat earnings when economic growth is moderating isn’t that bad, especially considering that profits last year were juiced by the big corporate tax cuts in the U.S. There something else to bear in mind, according to the strategists at Richardson GMP. “If we have learned anything over the years, U.S. companies are very good at making sure analysts’ estimates are beatable,” they wrote in a research note Monday. “The positive surprise rate has been averaging 60 (percent to) 70 (percent) for some time now. Guess everyone took the ‘better to under promise and over deliver’ to heart.” Here’s the thing: the S&P 500 Index on Friday rose above 2,900, a level that represents the average year-end forecast from 25 firms tracked by Bloomberg. Only three times during the last two decades has the S&P 500 surpassed the year-end target this early: 2012, 2013 and 2017, according to Bloomberg News’s Lu Wang. The question is, will companies guide earnings forecasts for the rest of the year up by enough to justify current valuations?

HOW SOON WE FORGET Markets are starting to become concerned again that volatility is too low across asset classes, triggering another “volmageddon” like the one in early February 2018. That’s when an extreme amount of bets on tranquil markets were quickly reversed, causing a broad sell-off in riskier financial assets such as stocks and corporate bonds. Morgan Stanley for one is warning that the current level of low volatility can’t last at historic lows much lower. “There are still two things that argue against the current levels of volatility being correct or sustainable,” the firm’s cross-asset strategist Andrew Sheets told Bloomberg News’s Joanna Ossinger. “The first is that market liquidity is still not great. The second: I’m not sure that the market in its newfound optimism has taken the story to the logical conclusion” about where asset prices are headed, he said. It’s no secret why volatility across all asset classes is back to being so low: the dovish shift from global central banks, increased economic stimulus from China and easing trade tensions. But as Ossinger reports, a disconnect between the growth in financial market size over the past decade and the capacity of banks to take on risk — which hasn’t kept pace — could exacerbate any sell-offs. Complacent market participants who equate a Federal Reserve on hold with low volatility is also an issue, and big price moves could soon surprise, Sheets said.

FARMERS ARE WORRIEDThe U.S.-China trade war can’t end soon enough for soy farmers. Total U.S. soybean exports fell to 460,700 metric tons last week from 888,700 tons the previous week and just above 446,500 tons in the same week a year ago, according to weekly inspection data released by the U.S. Department of Agriculture on Monday. The fact that shipments are now at their lowest level since before the trade war began could be a worrisome sign for growers hoping China might accelerate purchases ahead of a trade deal, according to Bloomberg News’s Michael Hirtzer and Dominic Carey. Of the soy shipments last week, 130,200 tons were loaded for China. Some U.S. farm groups are concerned that the Trump administration would accept Chinese purchase target pledges on a host of agriculture products without a promise to lift retaliatory tariffs. “This is of great concern to producers out here facing another year of tariffs,” Mark Powers, president of the Northwest Horticultural Council, which represents cherry, pear and apple growers in the Pacific Northwest, told Bloomberg News. “We’re disappointed. Clearly the priority lies elsewhere.” The Bloomberg Agriculture Subindex has fallen 2.97 percent this year, compared with a gain of 7.32 percent for the broader Bloomberg Commodity Index.

THE WON WINSThe big winner in the currency market Monday was the South Korean won. The currency strengthened as much as 0.65 percent, the most since January.  The won’s appreciation came as South Korean President Moon Jae-in said it’s time to prepare for talks with North Korean leader Kim Jong Un. In many ways, it’s as if Moon was taking a page from the Trump administration’s playbook on market tactics, coming out and making statements that investors would view favorably when things look bleak. It’s also notable that Moon spoke just days after returning from a visit to the White House where he tried to get faltering nuclear negotiations back on track. It’s also notable that the won last week weakened to its lowest against the dollar since 2017. Moon, who has tried to be a bridge between Kim and President Donald Trump, said that North Korea’s leader is committed to denuclearization and that the U.S. president feels a top-down peace process is necessary for the divided peninsula, according to Bloomberg News’s Youkyung Lee. Kim and Trump’s February summit collapsed without a deal, with both sides blaming the other for the breakdown. South Korea’s benchmark Kospi index of stocks also rose, rallying 0.42 percent even as the MSCI Emerging Markets Index fell as much as 0.33 percent.

TEA LEAVESFor all the talk about the coming economic slowdown, things are actually getting better. The Federal Reserve Bank of Atlanta’s GDPNow Index, which aims to track growth in real time, has risen to 2.27 percent from a “stall speed” level of 0.17 percent just a month ago. One of the bright spots appears to be housing, which has received a boost from the big collapse in mortgage rates just in time for the all-important spring selling season. We’ll get a sense of housing conditions on Tuesday, when the National Association of Home Builders releases its monthly market sentiment index. The median estimate of economists surveyed by Bloomberg is for a slight gain to 63 for April from 62 in March. Bloomberg Economics is more optimistic, calling for a reading of 64. “The housing market is benefiting from the Fed’s patience pledge on rates by improving affordability via lower mortgage rates,” Bloomberg Economist notes in a research note. “The S&P 500 Homebuilders index has gained about 4 (percent) so far in April, which should support builders’ sentiment. Mortgage applications are up 8.1 (percent) so far in April on the back of a 7.0 (percent) increase in the previous month.”

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To contact the author of this story: Robert Burgess at bburgess@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.

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