Sub­dued mar­ket re­ac­tion to China GDP

Financial Mirror (Cyprus) - - FRONT PAGE -

Af­ter weeks of in­tense spec­u­la­tion, the mar­kets com­menced the trad­ing week with con­fir­ma­tion that China GDP growth had slipped be­low the gov­ern­ment tar­get of 7%. The econ­omy ex­panded at 6.9% over the pre­vi­ous quar­ter and while this is not hor­ren­dously be­low tar­get, this is the first time since 2009 that eco­nomic growth has printed be­low 7% and re­in­forces con­tin­ual con­cerns about slow­ing growth through­out the global econ­omy.

Sus­pi­cions are high that the China econ­omy will suf­fer from fur­ther de­clin­ing eco­nomic mo­men­tum next year and I con­tinue to ex­pect the Peo­ple’s Bank of China (PBoC) to de­fend gov­ern­ment tar­gets and pre­vent growth from slip­ping even lower. While we are reg­u­larly wak­ing up to on­go­ing con­cerns over the health of the China econ­omy, this will not be a huge con­cern do­mes­ti­cally un­til it be­gins to neg­a­tively i mpact lo­cal em­ploy­ment prospects. I con­tinue to re­peat that it will al­ways be those economies that are heav­ily re­liant on trade with China that will have to cush­ion slow­ing growth in the eco­nomic pow­er­house, mainly be­cause they will also have to suf­fer from the fall­out from a de­cline in China de­mand for its prod­ucts.

Al­though im­pact on the GDP data from China had the cur­rency mar­kets, traders a sub­dued should not un­der­es­ti­mate that this is an enor­mous piece of data for the Fed­eral Re­serve when it comes to rais­ing U.S. in­ter­est rates in 2015. Bear­ing in mind that the U.S. cen­tral bank citied global eco­nomic weak­ness as a pri­mary rea­son to de­lay rais­ing in­ter­est rates, fur­ther signs of growth slow­ing in an eco­nomic pow­er­house, along­side the re­oc­cur­ring con­cerns over the pace of growth in both Europe and Ja­pan should fur­ther sus­pi­cions that the Fed will not be rais­ing in­ter­est rates this year.

Af­ter jump­ing around $90 since the be­gin­ning of the month to trade at a near four-month high above $1190, Gold has slipped to trade to­wards $1170 as traders take profit on the me­tal. Al­though Gold has made strong gains through­out Oc­to­ber, I still think that the me­tal has po­ten­tial to con­tinue trad­ing higher be­fore the end of the year. US in­ter­est rate ex­pec­ta­tions for 2015 are not only di­min­ish­ing as each trad­ing week passes, but also be­ing pushed fur­ther back into 2016 with this pro­vid­ing en­cour­age­ment for in­vestors in Gold.

Not only has the pushed-back US in­ter­est rate ex­pec­ta­tion pro­vided pos­i­tive mo­men­tum for Gold, but also in­creased safe-haven ap­peal as a re­sult from con­fu­sion on cen­tral bank in­ten­tions.

The mar­kets are lack­ing clar­ity on cen­tral bank in­ten­tions from the US, as well as the ECB and pos­si­bly the Bank of Ja­pan (BoJ) on whether both could ease mone­tary pol­icy fur­ther. The threat of cen­tral banks act­ing to rein­vig­o­rate growth might re­sult in a lack of trust from traders to in­vest in cur­ren­cies and en­cour­age de­mand for

al­ter­na­tives and safe-haven as­sets such as Gold.

The GBPUSD is cur­rently teas­ing the prospect of mov­ing past 1.55, which is seen as sig­nif­i­cant re­sis­tance, hav­ing had lim­ited gains in the pair for nearly a month. This move is threat­en­ing to hap­pen as three mem­bers of the Bank of England (BoE), in­clud­ing Gover­nor Mark Car­ney, are set to tes­tify at the trea­sury com­mit­tee. For the GBPUSD to fi­nally ad­vance to 1.55 and to tease a larger gain for the GBP, op­ti­mistic com­ments around the pos­si­bil­ity of fu­ture UK in­ter­est rate rises will be re­quired.

It is clear from sev­eral BoE mem­bers that the cen­tral bank would pre­fer to be­gin nor­mal­is­ing mone­tary pol­icy, but per­sis­tent weak­ness in in­fla­tion has re­peat­edly pushed back UK in­ter­est rate ex­pec­ta­tions over the past year. We are now see­ing sig­nif­i­cant im­prove­ments in UK wage growth, which should fil­ter through other ar­eas of the UK econ­omy and im­prove in­fla­tion prospects as we en­ter the be­gin­ning of 2016.

With that be­ing said and de­spite the BoE clearly be­ing keen to start rais­ing UK in­ter­est rates, I can’t see a rate rise un­til June 2016.

For in­for­ma­tion, disclaimer and risk warn­ing note visit:

Mar­kets Re­port

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