China mar­kets con­tinue to look vul­ner­a­ble

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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