China markets continue to look vulnerable
Markets are waking up to further signs of economic weakness in China following another PMI contraction overnight from Monday.
While it is true that expectations were for a contraction anyway, the data just provided further confirmation that economic momentum is slowing down in China with the economy looking further exposed and increasingly vulnerable to dropping below Beijing’s 7% GDP before the end of the current quarter.
The chances of GDP growth falling below the government’s target are intensifying each time an economic announcement is released from China, mainly because all data is consistently pointing towards the economic momentum declining.
What does the data mean for the PBoC? The central bank is going to remain under intense pressure to continue reinvigorating economic momentum with this including the heightened possibility of more interest rate cuts, loans available for banks and probably further Yuan devaluation. Market participants should make no mistake at all, the government GDP target at 7% is absolutely critical, and the PBoC will do whatever it takes to limit the probability and increasing threat of this target being missed.
What is the threat to the global economy with China slowing down?
The greatest risk is that exports and basically trade relations with China are set to decline. As peculiar as this might sound, China can actually handle slower economic growth because the economy is in a transitional stage where it is trying to diversify from any particular sector and build a domestic reliance.
The problem with this is that those economies which are dependent on trade with China will have to handle the fallout from this, which ultimately will mean less trade from China.
Despite the Reserve Bank of Australia (RBA) leaving interest rates unchanged once again on Monday, the AUDUSD remains under pressure. The central bank is refraining from talking down the currency on such a regular basis, and the major reason is because it is fully aware that the currency will decline anyway with the China risks continuing.
Australia is a major trading partner with China, meaning that the Australian economy is naturally going to face downside pressures with the China economy continuing to show weakness. The positive news for Australia is that the RBA’s interest rate cuts earlier this year are showing signs of improving domestic data with a combination of retail sales, construction output and other releases coming in above expectations recently.
After suffering a completely unexpected and sudden reversal that saw the GBPUSD dramatically tumble from two-month highs towards near two-month lows within three days, the GBPUSD is trying to find stability. The comments from BoE Governor Mark Carney over the weekend that the UK economy is somewhat protected from global shocks was a likely attempt to raise investor sentiment towards the Pound and UK markets, while also preventing the FTSE from further losses.
Speaking of Carney, it’s quite clear that he would like to begin raising UK interest rates and there is still optimism that this can begin early next year. While the recent aboveexpectation core inflation readings and further economic improvements will encourage further calls to begin raising UK interest rates, it’s probable that the ECB is going to at least threaten further monetary easing, and this might encourage reluctance from the BoE because the interest rate differentials would encourage further downside movement in the EURGBP.
It shouldn’t be understated how pivotal the recent rally in WTI will be towards allowing the emerging market currencies to recover what were brutal losses throughout the summer months. The sharp bounce in commodities like WTI will allow some of these EM currencies to begin recovering sharp losses, with economies linked to commodity exports noticing an improvement in investor sentiment.
Bearing in mind that it was the Malaysian Ringgit that was punished the most throughout the late summer months, this could also be the currency which benefits and welcomes an opportunity to recover losses. In the longer term there are still risks ahead such as the fallout of declined China trade and increased inflation pressures, but WTI continuing to rally will at least allow the USDMYR to target 4.15.
The Indonesian economy is heavily reliant on commodity exports, so it is natural to expect the sentiment towards both the Indonesian markets and Rupiah to improve following the sharp gains in WTI. Indonesia is still at risk to further downside pressures when you take into account that GDP forecasts are already missing expectations and that China is a major trading partner for Indonesia, however the improved investor appetite for oil still represents a welcome opportunity for the Rupiah to recover some losses.
While India is far more protected than other emerging markets when it comes to downside pressures and is actually i mpressing investors when it comes to its economic performance in 2015, the Indian Rupee still hit a fresh two-year low above 66 against the USD last week. While the sentiment towards India is robust, it is the threat from the central bank that it might not yet have concluded monetary easing, despite already acting on more than one occasion this year, that is restricting the currency from recovering losses.