There’s no hiding from it, the data from China continues to disappoint. Whether the rest of the world will adjust quickly enough to this new reality, and indeed what exactly the new reality is, is open to question. My suspicion is that the Chinese authorities will attempt additional stimulus to stave off disaster. One things for sure, if the data is coming out this weak it’s probably much worse in reality. We will need to watch out for instability in China if this continues, the Middle Kingdom has a history of vast social unrest if the population feels let down by the State. Perhaps the artificial island in the South China Sea is a symptom of the difficulties facing the Chinese government. If things are bad at home governments though out human history have employed the age old strategy to deflect by stoking up nationalist passions.
On the flip side, the data out of Australia was really encouraging. Exports rose more than expected and the services data was a positive surprise. For the last decade, Australia has looked more and more like a dependent of the Chinese economy so it’s particularly surprising that this should be happening despite the difficulties facing the Chinese economy. If that’s not enough, the commodity complex really does look like its basing. I’m still a sceptic on this issue though. When I look at the longer term chart of the oil price, I still believe a final low is a possibility. Only if I see Brent drive through the $42.50 level in this current bounce will I start to re-assess my view of one final low. Time will tell.
Tomorrow is non-farm payrolls day. Ahead of that we’ll get some more ISM and productivity data out of the United States and also GDP numbers from Brazil. I mention Brazil because it is another top 10 sized economy which has not done well during China’s period of slowdown. I’m less optimistic about better than expected data in this case, but if there is something it would definitely be noteworthy.
The pound sterling has been in recovery mode for the last few days. I don’t believe it’s sustainable. Merely the natural trend countertrend dynamic that is typical in markets. As I never tire of saying, markets don’t go in straight lines. We continue to believe that the prospects for the British pound are fairly dire. I don’t believe it’s going to be easy for the Bank of England to support a rate hiking cycle. The UK’s largest export market (the Eurozone) is not demonstrating robust economic health, and if that wasn’t enough the EU referendum hangs over the economy and the pound sterling like a bad smell at the moment. Even if that wasn’t the case, the legacy of the global financial crisis has left the UK in a precarious long term position. There are now huge amounts of gilts held by foreign investors, and anything which causes gilt yields to rise dramatically could cause a currency crisis. This is my opinion, and it is for this reason that I suspect the Bank of England will take some convincing to get hawkish.
As I mentioned earlier on in the weak, a really strong number tomorrow, which hints at tightening labour market conditions in the United States will cause a disruptive reassessment of US monetary policy. That’s the risk to look out for.
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