2023 began with analysts and economists optimistic on China’s growth outlook, as pandemic-era restrictions were lifted, but that boom is still to materialise and investors are wondering what it might mean for global equities.
Europe was meant to be one of the main beneficiaries of the China re-opening trade. Here’s Goldman Sachs from early January:
“China re-opening is an additional boost for Europe both in terms of economies (esp. Germany) and the equity market, where c. 10% of sales are to China,” GS equity strategists said in a Jan. 6 note.
That boost played out in the early part of the year but since the beginning of April, the benchmark STOXX 600 .STOXX has traded pretty much sideways.
So what is the latest China data telling us and what does it mean for stocks going forward?
Data released this week showed Chinese imports and exports fell much faster than expected last month, while consumer prices tilted into deflation, heaping pressure on Beijing to release more policy stimulus.
“China has disappointed just about everyone, but it’s in essence exporting deflation now,” said Stephen Dover, chief market strategist at Franklin Templeton.
“China will also likely increase its government stimulus. That will be good for global stocks,” Dover said.
Barclays equity strategists also seem to be turning more optimistic on China’s markets and those in Europe with exposure to the world’s second-largest economy, on signs that a trough has been reached.
“China is the only major region where money supply is growing, as the PBoC has already begun easing,” Barclays strategists said in a note.
“Measures to boost growth also continue to step up, with authorities vowing this week to provide funding help to the struggling property sector and relaxing the rules for travelling abroad, which could support services recovery.”
From a market perspective, Barclays says bad data appear to be seen as good news and with the bar for positive surprises not high, which could help China-exposed names in Europe.
Franklin Templeton’s Dover shares a similar view.
“Germany, the engine of Europe, is being squeezed on both sides. It was importing inexpensive resources from Russia and exporting higher value items to China,” Dover said.
“But from an investor point of view, that attitude about Europe is so negative that any positive surprise result in above-normal returns.”
And positive surprises have started to materialise. Citi’s economic surprise indexes, although still negative in China and Europe, appear to be turning a corner.
It might be time for investors to take note.
A JUMP IN GAS PRICES? NOT A BIG DEAL BUT… (0940 GMT)
Some fears about a new energy crisis and a fresh boost to inflation resurfaced as gas prices jumped earlier this week after news of possible strikes at Australian liquefied natural gas (LNG) facilities.
U.S. natural gas futures NGc1 have hit their highest in over five months this week, while Dutch gas futures TRNLTTFMc1, widely used as the benchmark for the European market, soared by nearly 30% in a day earlier this week, hitting their highest in two months.
UBS says “gas price volatility is here to stay” but notes European gas storage levels were 86% full as of July 31.
Commodity traders say there is no need to panic as far as LNG supply is concerned.
Citi analysts flag that 1-year forward gas prices affect Europeans’ utility bills a lot more than spot or near-term forward prices. Furthermore, the gas-to-HICP (harmonized index of consumer prices) pass-through takes a long time, so rises in the gas price are only relevant if sustained for months.
Some investors sound a bit more anxious about the issue.
“My energy analyst colleague remains concerned over the medium-term supply-demand balance outlook given the needed investment to increase supply capacity won’t be in place until 2025,” says Derek Halpenny, head of research, global markets EMEA & International Securities at MUFG.
ING analysts say the recent swings in natural gas prices also reflect the lingering risk of supply disruptions to the more benign inflation dynamics of late and warn about possible further rate rises from the ECB.
“The moves are a reminder that energy supplies have the potential to shift from abundant to tight quickly, for reasons that are often out of Europe’s control,” says Tim Graf, head of macro strategy for EMEA at State Street Global Markets.
SUBDUED START FOR STOXX 600, STILL SET FOR WEEKLY GAIN (0745 GMT)
A cautious tone has gripped European markets early on Friday, with most major indexes lower following the prior day’s rally after U.S. CPI.
Europe’s benchmark STOXX 600 .STOXX is falling around 0.5% but still looks set to finish the week higher, its fourth positive week in five.
Germany’s .GDAXI and France’s .FCHI blue-chip indexes were also heading lower early on Friday, while resilient GDP data from Britain failed to provide a lift to the FTSE 100 .FTSE, which is down 0.6% as markets wonder whether the Bank of England will have more to do to bring inflation down.
EUROPE SET FOR LOWER OPEN AS WALL STREET RALLY FIZZLES (0636 GMT)
European equity futures are heading lower on Friday, trimming some of the previous day’s gains after U.S. consumer price inflation had traders betting the Fed was done with rate hikes.
The view from Fed policymakers themselves might be different, with San Francisco Fed President Mary Daly saying it is yet to be determined if they have another hike in the pipeline.
Futures on the Euro STOXX 50 STXEc1 are down around 0.5% after a stellar 1.5% rally the day before. Futures on the DAX FDXc1, CAC 40 FCEc1 and FTSE 100 FFIc1 are all down 0.3%-0.6%.
Wall Street futures EScv1, NQcv1, YMc1 are little changed, while MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dropped 0.9% overnight to a one-month low, with stocks in Hong Kong and China the biggest drag.
BONDS DROOP AS INFLATION CHEER FADES (0551 GMT)
How do you put the cork back in a bottle of champagne? Perhaps ask your friendly bond dealer, as traders in the world’s deepest market quickly got over their excitement at steadying inflation, which held at 0.2% month-on-month.
Maybe markets were hoping for a surprise on the downside. Maybe a much bigger-than-expected budget deficit frightened prospective buyers, who stayed away at Thursday’s 30-year Treasury auction and left the Street holding the paper.
Primary dealers took their largest slice of the sale since February. Yields went up along the curve, even if markets took the risk of another rate hike next month down a little. Stocks gave up gains and might be in need of a new source of optimism.
Data is driving markets’ fine tuning of the rates outlook and today’s batch brings British growth data at 0600 GMT, which is expected to show annual growth inched along at 0.2% last quarter, and U.S. producer prices and consumer confidence data.
In Asia, Treasuries went untraded as Tokyo desks closed for Mountain Day – a public holiday aimed at enjoying mountains.
Yet the U.S. dollar held gains made overnight and took the yen back near levels that prompted intervention last year.
Joe Biden had overnight called China a “ticking time bomb” because of its economic challenges. Stocks there were back under pressure during Friday, with Alibaba 9988.HK handing back gains on its solid result and property stocks sliding.
China’s largest private property developer Country Garden 2007.HK is the focus of worry presently, as it struggles to make coupon payments, and its shares plunged to a record low on Thursday after the company forecast a $7.6 billion loss for the first half.
In Australia, a closely-watched dispute at major gas fields deepened with the national labour regulator allowing workers at two Chevron CVX.N facilities to vote on whether to strike.
The prospect of disruption there and at another Woodside WDS.AX facility, which together account for 10% of the liquefied natural gas market has lately roiled prices in Europe.
Outgoing Aussie central bank chief Philip Lowe, meanwhile, struck a dovish tone in an appearance before lawmakers saying recent data are consistent with the economy finding the “narrow path” to falling inflation without big rises in joblessness.
Lowe’s term ends in about a month, when he hands over to deputy Michelle Bullock and he said his focus would switch to lowering his golf handicap.
Source: Reuters