Comment – Sanjiv Shah

Both the OECD and Moody’s have warned about slowing global growth pointing to a sharper than expected slowdown in China. Yesterday both stocks and bonds were weak. The Dow rose and the S&P 500 and Nasdaq all fell by 1% as did many European indices. Asian Indices are mostly sharply lower and only China and Japan are again resisting the downward pressures. The latest Chinese data showed a further decline in inflationary pressures which is seen as giving room for the Chinese central bank to cut interest rates. Bonds yields rose a little further with about 1-2 bps rise across the curve. US Treasury 2 and 10 year Bond yields are 0.87% and 2.34% respectively.

China Inflation data
Today’s data shows China’s CPI in October at -0.3% (mom) the first monthly in prices since May. Food prices are a large contributor to the decline having fallen to 1.9% yoy from 2.7% yoy in the previous month. Factory gate prices continue to be very weak with the Producer Price Index coming at -5.9%. This indicates the pressures that China’s manufacturing sector is under as intense competition and slowing demand puts relentless pressures on revenues and profitability. Chinese equity markets initially fell 1% but recovered as market participants speculated that these numbers would lead to further monetary easing. Other Asian markets and metals are weak on the back of the China news. The Nikkei is +0.15% but the Hang Seng (-1.43%) and Kospi (-1.44%) are down

The OECD and Moody’s joined the IMF in cutting global growth forecast for this year (2.9% from 3.0% previously) and next year (3.3% from 3.6% previously). Moodys emphasised that the global economy is threatened by China’s slowdown. Copper prices have again fallen below USD 5000 per tonne as shown in the chart Above.

Copper is widely used across a range of industrial uses and its price trends are thought to be a good indicators for global industrial output. More precisely, some analysts believe it is strongly correlated with Chinas growth whereby the price per tonne dividend by a thousand gives a good estimate of China’s true rate of economic growth. This means a price of USD 5000 implies Chinese growth of
just 5%, much lower than the 7.5% official rate.

Dollar Strength
The US dollar continues to consolidate its recent strength with the Dollar (DXY) index at 99 and consolidating after its recent rise.

The dollar strength has been helped by Euro and Sterling weakness in recent days. The Euro was under some pressure yesterday following reports the ECB was considering even more aggressive easing (relative to expectations) in December. The article suggested that a consensus at the ECB for cutting the deposit rate further below its current rate of -0.20%. The article quoted one Governing
Council member saying ‘there is no bottom to the deposit rate in the near term’ and that ‘it could be lowered quite sharply still’. This caused an immediate decline in the Euro and in short term interest rate yields. 2 year German Bund yields fell from -0.3% to -0.34%

Today, Europe has industrial production data numbers in France and Italy. In the US, there are various data releases such as the October NFIB small business optimism index, the import price index and September wholesale inventories.

Risk Markets are opening slightly higher in Europe and look set for a slightly positive day in the USA.

Latest Update: Dec 17, 2015