Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
China data disappoints again
The lull in global equities continues with investors finding any excuse to stay on the sidelines after having enjoyed a period of good gains. The key drivers of risk aversion at the moment are Greece and China although the latter is always hard to judge. On Greece, investors are still feeding off comments made by Prime Minister Alexis Tsipras over the weekend. After a period of relative calm following the ascension of Syriza to power, the type of rhetoric that investors were initially fearing is beginning to flow through. Quite frankly though, it was always just a matter of time before this happened as Syriza was elected to ring in some changes. Tsipras has gone as far as throwing around language such as World War II repatriations from Germany and such language is certainly not constructive in bridging the gap. As a result, Greece started the week off on a sombre note with yields spiking and equities declining. This also put pressure on the rest of the region and derailed some of the recovery we’ve been seeing in recent weeks. The DAX in particular has now retreated from record highs but I continue to feel it remains in a very good position and even the data has been showing signs of bottoming in the German economy. Yesterday’s trade balance numbers showed a better than expected surplus with a sharp rise in exports being the dominant theme. Perhaps this was driven by the sharply weaker euro and with many analysts forecasting further weakness in the single currency and this trend is likely to continue.
India growing at a faster pace than China
In the emerging market space, China released more data today which continued to show signs of weakness. China’s CPI for January came in at just 0.8%, lower than an expected 1% and essentially confirmed the weakening domestic demand/activity the economy is facing. This CPI reading was also the lowest in around five years and PPI contracted by a wider than expected 4.3%. An interesting statistic is the fact India is now growing at a faster pace than China. Yesterday’s GDP figures out of India smashed expectations, coming in at 7.4% when the market estimate was just 6.6%. China announces its growth target of the year in March and analysts are expecting this at around 7%. This will be a key event as it’ll then determine whether China will need to open the taps or not. If there is no need to (should the target be easily achievable), then it’s likely China will be just looking to press on with reforms. Regardless, China equities managed to edge higher today with the recent run of data in China driving speculation of further easing. With Chinese investors continuing to drift away from property and shadow banking, excessive speculation in equities is likely to remain a key theme this year particularly given the state of the economy.
CBA and Telstra retreat
The ASX 200 is headed for the second negative day after the twelve session run ended on Friday. This lull is not a big surprise given the Greece situation is seeing investors continue to shed risk and we are headed for some key corporate earnings this week. The situation in China hasn’t done iron ore any favours and it seems the restocking that many analysts were expecting heading into Chinese New Year hasn’t really ramped up. While iron ore futures have gained in Asia due to stimulus speculation, a lot of the fundamentals remain subdued. This is likely to keep most of the iron ore names contained in the near term. CBA reports tomorrow and Telstra on Thursday and it seems investors aren’t keen to keep pushing the stocks higher at the moment.
Greece to remain in focus
Ahead of European trade, we are calling the major bourses flat to mildly weaker as investors continue to deliberate how the Greece situation is going to play out. Any calm on that front will be well received by markets and headline risk around the issue will remain rampant. The euro continues to hold on despite the drama surrounding Greece but unless we start to see some positive reinforcement on a fundamental level, then the price action will likely come under threat at some stage. There isn’t much data on the calendar but we have Eurogroup meetings and UK manufacturing and industrial production to look out for.