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China Exports Decline

Markets Tread Cautiously as China’s Trade Surplus Expands on Export and Import Tumble

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Economic data from China today worried already nervous investors as the second largest economy continues to exhibit weakening fundamentals. Meanwhile, Japan’s GDP for the second quarter was revised modestly upwards to -0.30% compared to the earlier estimate of -0.40%.

China Surplus Expands on Falling Exports

Earlier today, China's trade balance data was released, showing that the Chinese economy's trade surplus expanded significantly since May, rising to $60.24 billion, from $43.03 billion in July and above the market estimates of $49.35. The trade surplus comes in light of declining exports but also a sharper import slump. The drop in exports marks a second consecutive monthly decline with financial markets trading cautiously on the data. On an annualized basis, Chinese imports fell 13.80% in August which marks the 10th consecutive month of deteriorating imports.While it is widely expected that China will experience a significant downturn in economic activity this year, the markets are more concerned by the pace of this deceleration which could result in a ‘hard landing’ for the Chinese economy. Being the second largest economy, a Chinese slowdown could result in further deterioration of the global economy as the US prepares to raise interest rates.

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Japan GDP Revised Higher

Second quarter GDP for Japan was revised modestly higher to -0.30% from the previous estimate of -0.40%. The upward revision was reflected mainly by inventories which were revised higher. Nevertheless, the risks of sustained economic contraction still remain. The decline in the second quarter's GDP comes on the heels of GDP expansion in the first quarter when Japan recorded growth at a pace of 1.00%. Japan, the third largest economy, has been battling decade-long deflation as the Bank of Japan makes use of quantitative easing in a bid to boost inflation and stimulate growth. However, for the most part of this year, data pointed to a continued slowdown with both GDP contractions and inflation trending well-below the Central Bank's target rate. More recently, the average wage growth was also seen to be declining. The BoJ has not engaged in any expansion to its QQE program for this year but could be compelled to do so should data continue to point towards disinflation and economic contraction.

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Eurozone GDP Due Later

The final revision for the Eurozone’s aggregate second quarter GDP is due for release today. Estimates point to an unchanged print at 0.30% compared to earlier estimates. At its latest meeting last week, the European Central Bank made downward revisions for both the GDP and inflation projections for 2015, 2016, and 2017, highlighting the perception that continued headwinds face the Euro Area economy. The Central Bank expects to see growth subdued in the Eurozone for most of this year and expects to see a turnaround only from 2017 onwards as external factors impact the regions growth prospects. While the ECB has refrained from expanding its sovereign bond purchases, it left the door open to the possibility of going beyond the September 2016 deadline to purchase sovereign bonds should growth fail to show any signs of pickup in the Eurozone.

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GBP and AUD Rebound

While the United States and Canadian fianncial markets were closed for business yesterday, the British Pound and the Aussie dollar staged a strong reversal beginning early in the Asian trading session. The British Pound gained as much as 0.64% yesterday with the Aussie trading flat but picking up momentum early in the trading session today, up 0.47% already. The rally in the British Pound comes ahead of the Bank of England's meeting and interest rate announcement scheduled for later in the week. While no major policy changes are expected, the markets are more tuned to the MPC's vote count which currently see's one dissenter as eight members opt to keep interest rates unchanged. The current rally in GBP is likely to indicate either a short covering in the British Pound or positioning ahead of the MPC votes, which could see more MPC votes swung in favor of a rate hike.

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