The Chinese trade data released this week, came in well below expectations. Whilst generally unreliable, other data confirms the slowdown of the Chinese economy. Markets expect that China will increase its stimulus programme in response to the slowing economy, which, in the past, has been the traditional response. However, comments by the Chinese Premier Mr Li (see below), suggest otherwise, at least for the present.

Japanese core machinery orders, an indicator of future capex, came in much lower than expected. It is clear that Japanese businesses remain particularly cautious. The Nikkei has underperformed this year, closing down -2.4% (over 7.0% on the week) and below 14,000 on Friday. I remain highly sceptical of Abenomics and the BoJ policy.

Whilst Mr Draghi was particularly dovish at the press conference following the last ECB meeting, subsequent comments by ECB representatives seem to suggest that they are backing off the idea of QE, in particular in the near future. As a result, the Euro has risen from the lows (around US$1.37) it reached following Mr Draghi’s press conference. In addition, the FED minutes were dovish, which resulted in the US$ declining further against the Euro. The ECB will have to deliver something meaningful in the near future or run the risk of the Euro heading for US$1.40 – currently at US$1.3885.

Russia has escalated tensions relating to the Ukraine. They have threatened to cut off gas supplies, which will not only affect Ukraine, but Europe as well. Germany is particularly vulnerable. The uncertainty has also contributed to a sell off of European markets.

The sell off of momentum stocks, in particular those quoted on Nasdaq, has spread to the wider markets globally. Apart from a brief rally following the release of the FED minutes, markets continued to decline sharply over the week, with the Nasdaq closing below 4,000. Market sentiment has clearly turned bearish. Investors are rotating out of the higher beta stocks and into large cap and higher dividend paying defensives. The US 10 year bond yield, which should be rising as the FED continues with its tapering programme, has declined to 2.62%. The focus has now moved to the US earnings season, with a number of investors concerned that the results will disappoint. Indeed, J P Morgan missed estimates, both in terms of revenues and earnings, though Wells Fargo came in better than expected. Whilst most companies are expected to beat their earnings estimates, having guided them down, markets are likely to focus far more on revenues and forward guidance statements.

US
Consumer credit rose by a net US$16.5bn in February (US$14.1bn expected), with a rise of US$18.9bn in nonrevolving credit and a contraction of US$2.4bn in revolving credit. The increase of credit was mainly due to an increase in auto and student loans.

The NFIB small business optimism index increased in March to 93.4, up from 91.4 in February and above the rise to 92.5 expected. Businesses are optimistic that sales will increase and, in addition, hiring plans by small businesses have improved.

The Jolts survey indicated that there were 4.2mn job openings in February, up from 3.9mn in January. Job openings were at the highest level since January 2008.

US regulators approved a plan to increase leverage ratios of large banks (8 of them) to at least 5.0% of their total assets, which is higher than the 3.0% set out in the Basel agreement. The target for smaller banks was set at 3.0%. The increase in the leverage ratio would mean that the large banks will need to raise an additional US$68bn in additional capital. However, the new rules were less draconian than those proposed previously.

The FED minutes were dovish and played down expectations that interest rates would rise faster than previously thought. There was no reference to the suggestion that the FED would raise rates 6 months after the end of the tapering programme, as Mrs Yellen seemed to have suggested. The minutes also revealed that the FED was concerned about misleading the market on interest rates. Markets rallied following their release, with the US$ and bond yields lower.

US weekly jobless claims came in at 300k, below the 320k expected and the revised 332k the previous week. It was the lowest level of claims since May 2007. The 4 week moving average came in at 316.25k as opposed to the revised 321k previously.

Europe
The deadline for France to reach its budget deficit limit of 3.0% of GDP is currently scheduled for 2015, having been postponed twice already. Whilst the new finance minister claims that France will stick to its targets, it looks as if he is trying to get the EU to agree to a further extension.

German February industrial output increased by +0.4% M/M, better than the +0.3% expected, though lower than the rise of +0.7% in January. Output increased by +4.8% Y/Y. A German economic institute increased its forecast for GDP this year to +1.9%, from +1.8% previously. However, exports fell by -1.3% in February, whilst imports rose by +0.4%, with the trade surplus coming in at E15.7bn, lower than the E17.2bn expected.

Interestingly, Spanish February industrial output rose by +2.8% Y/Y, above the increase of +1.7% expected. The economy minister states that growth continued to gain momentum in Q1.

Greece launched a 5 year bond, the 1st bond issue since its bailout some 4 years ago. With some E20bn of demand, the issue raised E3bn at a yield of just 4.95%. There was also better economic data – February industrial output increased by +1.7% Y/Y, well above the rise of +0.7% expected and +1.1% increase previously and the 3rd consecutive monthly increase. Unemployment also declined in January, though remains particularly high at 26.7%. However, deflation persists. CPI came in at -1.3%, worse than the decline of -1.1% expected.

UK industrial production increased by +0.9% M/M in February, much higher than the rise of +0.3% expected. The rise is yet more evidence of a continued and more broadly based improvement of the UK economy.

The Donetsk region of the Ukraine have announced the creation of the People’s Republic of Donetsk. Russia certainly does not want the Ukraine to become a member of NATO. Mr Putin has threatened to cut off gas supplies to the Ukraine if they do not pay the amount owing and/or if they do not pay in advance. The Ukraine is a major transit route for gas supplies to Europe. German markets are particularly vulnerable to problems in the Ukraine. However, with the Russian economy facing difficulties (a recession is likely this year), I would suspect the Russia will be careful. The Crimea was seen as strategic to Russia. The East of Ukraine is not in that category, though no doubt Russia would not be displeased if the East of the Ukraine sought autonomy. However, the situation is unlikely to be resolved in the near future, which will increase uncertainty.

Russian capital outflows totaled US$50.6bn in Q1, more than the US$17.8bn in Q4 2013 and the highest since the Lehman crisis. The economy minister downgraded Russian GDP this year to between 0.5% to 1.1%, though a number of analysts believe that the Russian economy may actually contract this year. Russian markets are amongst the worst performer this year and the Ruble has declined by around 8.0% against the US$.

Japan
The BoJ, as expected, did not add to its current monetary stimulus programme. The central bank will continue with its Yen 60 tr to Yen 70 trn asset purchase programme. However, the Governor, Mr Kuroda, did say that the BoJ would adjust policy without hesitation as necessary. It is thought that the BoJ will increase its monetary easing policy in the next few months as the impact of the sales tax slows domestic consumption.

The Japanese current account rebounded into a surplus in February, the 1st in 5 months. The surplus came in Yen 613 bn, somewhat less than the excess of Yen 618 bn expected.

Japanese core machinery orders declined by -8.8% much worse than the decline of -2.6% expected. Whilst a generally volatile data point, Japanese officials expect the trend to be negative in coming months.

The Japanese cabinet has stated that nuclear remains an important source of electricity and that reactors which pass safety standards will be restarted.

The Wall Street Journal reports that the Japanese PM, Mr Abe is to meet the BoJ governor, Mr Kuroda, with the implication that he will request the BoJ to ease monetary policy further.

China
Chinese exports declined by -6.6% Y/Y in March, well below the rise of +4.8% expected, with imports down -11.3%, also below expectations for a rise of +3.9%. The decline in exports is very likely (at least partially) due to a decline/cessation of capital inflows (to benefit from higher interest rates and a strengthening Yuan) which were previously classified as exports. The decline in imports is partially due to a decline in commodity prices. However, it is clear that the Chinese economy continues to slow. There is increased speculation that the Chinese authorities will increase their stimulus programme, though the Premier Mr Li stated that the government “will not take, in response to monetary fluctuations in economic growth, short term and forceful stimulus measures”. The measures announced to date have been less than anticipated.

The Chinese Central Bank, the PBOC, has managed the Yuan lower this year. In response, the US has warned China not to revert to its previous policy of manipulating the value of the Yuan to lower levels.

CPI rose to +2.4% Y/Y, in line with estimates and below the government’s target of +3.5%. However, the producer price index declined by -2.3% (-2.2% expected), more than the -2.0% fall in February and the 25th month in deflation territory.

Other
The Indian general elections have started, though will take some 5 weeks to conclude. The BJP party, lead by Mr Modi looks the clear favourite at present, with the current ruling party, the Congress Party, facing a major loss.

The Australian unemployment rate unexpectedly declined to 5.8% in March, down from a revised 6.1%. The sharp decline has resulted in traders bringing forward expectations of a rise in interest rates, which has strengthened the A$.

Kiron Sarkar
!2th April 2014

Category: Markets

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