Moody's Downgrades China

Analisi Giornaliera - 24/05/2017

Debt Risks and Leverage Loom Large Over Chinese Economic Activity

Moody's Investors Services cut China's sovereign credit rating for the first time since 1989, citing expectations that the financial strength of the world's second-largest economy will deteriorate in the next few years as debt levels keeps mounting. Moody’s reduced China’s rating by one notch to A1 from Aa3.

Yuan Retreats Amid Ratings revision

The downgrade overnight from Moody’s comes at a time when the Chinese government is wrestling with the twin challenges of slowing economic growth and rising financial risks emanating from soaring debt.

While the latest rating cut is likely to marginally increase the cost of borrowing for the Chinese Government and its state-owned firms, it remains comfortably placed within the investment grade range. Also, most Chinese sovereign debt is held by domestic investors, shielding the country from any major negative impact of the downgrade. Still, Moody’s move underscores doubts that President Xi Jinping’s government will succeed in simultaneously shedding excessive leverage in the system, while keeping the economic growth engine chugging above the 6.50% growth target. The news sent the Yuan -0.20% lower against the dollar, with USDCNH currently hovering around 6.8800.

US New Home Sales Tumble

Sales activity for newly built US homes fell sharply in April, reversing from a ten-year high reached a month earlier. Purchases of new, single family houses slid -11.40% to a seasonally adjusted annual sales rate of 569,000 last month. Economists polled by The Wall Street Journal had forecast a sales drop of only -1.00% after sales of new homes hit an annual pace of 642,000 in March, the highest since October of 2007.

Investors need to note that monthly sales data are prone to high volatility. Year-on-year figures provide a clearer picture of the trend, with new home sales climbing 0.50% in April from the same period last year. After rising for the last four sessions, Dow Jones Industrial Average June futures are flat above 20900 in early Wednesday trade, with 20950 representing resistance on the upside.

Swiss Industrial Orders Drop

Orders to industries in Switzerland, a leading indicator of factory output, fell -4.60% year-on-year during the first quarter according to figures produced by the Swiss Federal Statistics Office. A -10.00% tumble in capital goods orders was the main factor weighing on the figure alongside a -3.00% decline in intermediate goods.

Meanwhile, consumer durable goods orders surged 14.00% during the first quarter, while non-durable goods orders edged 1.00% higher on a quarter-over-quarter basis. Separately, customs data showed Tuesday that the country’s trade surplus narrowed in April, as the economy continued to grapple with the strength in the Swiss franc compared to currencies of major trading partners. The merchandise trade surplus contracted to CHF 1.97 billion ($2.03 billion) last month, the lowest since December of 2014. The tumble last week that sent USDCHF to a 6-month low has reversed modestly, with the pair largely range-bound early Wednesday around the 0.9760-mark.

New Zealand Exports Reach 2-Year High

New Zealand posted its biggest monthly trade surplus in two years as exports of dairy, wine and wood increased more than expected. The country’s trade surplus came in at NZD$578.0 million ($405.5 million) last month, the highest reading since March of 2015. Economists surveyed by Bloomberg had anticipated a surplus figure around NZD$267.0 million. Year-to-date, the trade deficit narrowed to NZD$3.5 billion. Exports jumped 9.80% year-over-year in April to NZD$4.8 billion, also the highest in over two years while easily topping projections of NZD$4.4 billion. Higher prices lifted the value of outbound shipments of dairy products and wine in particular.

Apart from the export optimism, imports edged 4.90% higher year-on-year to NZD$4.2 billion, above estimates of NZD$4.1 billion. Improved trade was not enough for NZDUSD to overcome strong resistance around 0.7050, with the pair nearly flat on the session at 0.7010 in early Wednesday trade.