Chinese Recovery Back on Track

Daily Analysis - 19/10/2016

Equities Rise as China Economic Activity Hits Targets

Equity benchmarks across the globe are trending higher on Wednesday following overnight data from China that showed government and central bank stimulus efforts succeeding in stabilizing the economy. However, the one disappointment reported was decelerating industrial production growth which slowed to 6.10% year over year.

China’s GDP Expansion Matches Goals

China's GDP grew 6.70% for the year through September, in-line with estimates, as robust public spending more than offset tepid private investment. Economists now believe the major near-term threat to economic activity is a possible correction in the red hot real estate market, which accounts for nearly 15.00% of GDP. Property investments accelerated last month and home sales surged in China, highlighting strong investor demand even as the government carries on with its measures to curb prices. Additionally, the National Bureau of Statistics has warned on the “foundation of continued economic growth” not being sufficiently robust. Although better than anticipated retail figures and strong fixed asset investment do build upon an optimistic outlook, internal and external risks to the outlook remain significant. The Yuan continues to weaken versus the US dollar, with the US dollar-offshore Yuan pair trading just shy of recent highs.

Crude Reclaims $50-Mark

US crude oil futures rebounded from lows made in the prior two sessions after the Organization of the Petroleum Exporting Countries reiterated its commitment to limit production. November West Texas Intermediate crude added 0.90% to hover close to $50.75 per barrel on the New York Mercantile Exchange, while December Brent futures rose 0.80% to $52.10 a barrel on London’s ICE exchange. OPEC members agreed in September to cap output at 33 million barrels a day, effectively slashing production from the current level of almost 34 million barrels. However, speculation has been growing that the 14 member cartel might fail to iron out the final details of the deal. OPEC secretary-general, Mohammad Barkindo, speaking on Tuesday, dismissed those worries and reminded financial markets of the group’s commitment to stabilizing the flagging oil market.

US Dollar Retreats From 7-Month High

The US dollar retreated from a seven-month high against a basket of six major currencies after consumer prices in the country indicated a moderation in underlying inflation, prodding investors to trim bets on a December Federal Reserve interest rate hike. The core Consumer Price Index, which excludes food and energy costs, rose 0.10% in September, slowing the year-over-year increase in core CPI to 2.20% according to data from the Labor Department on Tuesday. Fed Fund futures now project a 65.00% likelihood of the US Federal Reserve raising rates in December, down from 70.00% before the release of the CPI data. In the meantime, the Euro is holding steady around $1.0984, just above Monday's 2-month low of $1.0964. A break below that level could see EURUSD retest the June 24^th “Brexit” low of 1.0912.

Gold Gains Capped on Rising Equities

Gold held on to gains in early Asian trading after surging 0.60% during the prior session. However, strength in equity markets around the globe has capped any further gains. Spot gold was marginally higher at $1,264.20 per troy ounce, while US gold futures inched up to $1,264.30. Gold added to overnight gains in the US after disappointing inflation data prompted investors to slash odds of the Federal Reserve tightening monetary policy in December. The safe haven metal is especially sensitive to moves in US interest rates, as any hike would increase the opportunity cost of holding a non-yielding asset like bullion. The recent dip in the dollar has helped gold prices rebound modestly in the interim, however, should the ongoing pullback in the US currency reverse course, any upside in the dollar is likely to see gold retest the critical $1250.00 level.