China Growth Shakeup

Analisi Giornaliera - 19/01/2016

GDP Expansion in the Globe’s Second Largest Economy Decelerates in Latest Reading

The Chinese economy appears to be slowing down despite all the accommodation from the Peoples Bank of China. During the past year, efforts to steer growth through rate cuts and reserve ratio requirement reductions have not been effective enough in offsetting slower growth and a deceleration in the country’s industrial production as evidenced by the data.

China’s Growth Eases Further

The Chinese National Bureau of Statistics reported that gross domestic product expanded at the slowest pace in the last 25 years ago. Annualized growth printed at 6.80%, slightly below last prior quarter’s reading of 6.90%, meeting consensus expectations from analysts. On a quarterly basis, growth fell to 1.60% from previous quarter’s 1.80% increase, underlining softening fundamentals. As the economy shifts, weakness in mining, construction and heavy industry is falling whereas consumption spending, technology and services are proving a modest offset. The slowdown in growth also reflected declines in industrial production which slowed to 5.90% expansion from previous month’s 6.20% growth while retail sales also declined, dropping to 11.10% in December from November’s 11.20%. Efforts undertaken by the Central Bank to restore growth have largely fallen short, with the latest data showing that policymakers have more to do to stabilize the economy

Stocks Back on Track

European stocks experienced a modest rebound during yesterday’s session after having tumbled the previous week, reflecting the weakness in Chinese financial markets. Echoing Chinese equities rebounding on Monday, the German DAX 30 bounced after reaching a low of 9410.00 on Friday, climbing to 9659.50 on Monday. The French CAC mirrored the move, clawing back from Friday’s low of 4140.00 to close at 4246.00 on Monday before once again retreating modestly. With US equity markets closed on Monday for a public holiday, major index futures also reflected the upbeat momentum that began in China, with the S&P 500 pulling back higher after Friday’s drop, rising to 1894.50 while the Dow Jones continuing to rebound higher overnight. While confidence building measures in China and direct intervention in financial markets has helped to offset some volatility from earlier in the year, more major benchmarks are approaching bear market territory.

Ruble Plunge Endures

The new multi-year lows in oil prices led the Russian Ruble to hit new multi-year lows on Monday, echoing a worsening economic outlook for Russia. The USDRUB reaching a record high of 79.3899 amid the further decline in oil prices following the lifting of Iranian sanctions. Oil prices, a major export sustaining Russia’s economy, are forecast to fall even further with newly restored Iranian exports expected to add to the global glut. While Government revenues have managed to stay relatively insulated thanks to the devaluation, the Ruble reflects the importance of oil exports as half of the country’s budget revenues comes from the energy industry. With oil prices expected to tumble further, the Russian government has called several emergency meetings in order to counter the loss in revenues, concluding the discussions by deciding in a slash Government spending by 10.00%.

Gold Prices Remain Subdued

Ahead of inflation data due from major economies later in the session and throughout the week, gold prices remain under pressure as the rising dollar and globally deflationary trends impact the precious metal. The first rate hike by the Federal Reserve back in December which is expected to be followed by additional measures is expected to drive the dollar higher over time, further reducing the need for gold to hedge against losses in fiat currency. Although gold has not retested the 5-year low at $1046.34, should the US economy continue to outperform peers, it could be a matter of time before prices once again fall to the key level. A lack of demand in gold from the top consumer China, as the economy appears to be slowing down, contributed to a major downtrend from the middle of October alongside the strong dollar, with further depreciation anticipated.