ASX at the close

by Angus Nicholson, IG

After going through a battering so far in 2016, Asian markets looked determined to hold onto their early morning performances despite the Chinese data releases missing market expectations on every line.

• Markets were looking towards a strong Chinese data print today, so it’s notable that we haven’t seen a sharp selloff in the wake of these worse than expected economic figures. Oddly enough, global markets seem to be giving far more weight to the moves in Chinese equity markets than to the actual economic data. Despite the data miss, the Shanghai Composite has steadily gained throughout the session bringing itself to within touching distance of the key 3000 level. Some may question why global markets are taking their cues from the Chinese equity markets, which are widely pilloried for their erratic moves and poor reflection of fundamentals within their prices. One possible answer is that markets are less concerned with backwards looking data (of sometimes questionable veracity) and believe real time data, such as moves in the currency and equities, provide a better clue to how China is performing at the current juncture.

• But let’s dig into the data. Here’s the headline releases against the market consensus:

– Real Q4 GDP 6.8% YoY, 1.6% QoQ (est. 6.9% YoY, 1.8% QoQ)

– Nominal Q4 GDP 6.4% YTD YoY

– Retail Sales 11.1% YoY (est. 11.3% YoY)

– Industrial Production 5.9% YoY (est. 6.0% YoY)

– Fixed Asset Investment 10% YTD YoY% (est. 10.2% YTD YoY%)

• Despite the multiple interest rate cuts, reserve requirement ratio cuts and fiscal stimulus spending, China’s slowdown in growth looks to be accelerating. The ongoing dilemmas of China’s debt-laden and over-capacity-ridden industrial sector were on display with the miss on the IP and FAI numbers. Surprisingly, in the GDP release the secondary sector held up at 6% YoY growth in Q4. Although many have argued that China inflates the real GDP numbers through the use of its GDP deflator so it is important to look at the nominal performance as well. In nominal terms the secondary sector looks in far more dire straits, growing only 0.9% in Q4 (in YTD YoY terms).

• However, the great hope for China’s economic transition is that services growth can pick up the slack and the data releases today disappointed on this front as well. Retail Sales, which have been incredibly resilient over the past few months when we were seeing the worst of the Chinese equity selloff, saw their first weaker month in YoY terms since March 2015. This looks largely attributable drop off in clothing and footwear purchases in December. However, tertiary sector (i.e. services) growth also slowed in Q4 to 8.3% YoY from 8.4% the previous quarter. Tertiary sector growth is likely to slow even more sharply in Q1 as the big boost from financial intermediation associated with the stock market rally drops out of the year-on-year comparison. Taken together, the Chinese data dump today should only serve to lower expectations for Chinese economic performance in Q1 (which is also seasonally disrupted by the Chinese New Year holiday).

• The open question with this data release is whether it makes it more or less likely that we see more stimulus measures from China. Given the pace of declines seen FX reserves over the past few months, which have a corresponding tightening effect on the monetary system, further cuts to interest rates and the RRR in 1H 2016 seem a foregone conclusion. The bigger question is whether we will see them before the Chinese New Year break. That seems less likely if the stabilisation we have seen in Chinese equities continues. Nonetheless, there will be large injection of liquidity by the PBOC before Chinese New Year through open market operations, which occurs seasonally before the holiday. But some have argued we are unlikely to see any major moves ahead of the G20 summit in mid-Feb, although it should be noted China chose to cut the RRR in February and April last year.

• The Aussie dollar’s moves have been interesting around the release. It initially lost ground on the release, but has largely retraced that loss in the past three hours. It is difficult to say if this is driven more by expectations for further stimulus from China or whether the market believes it is oversold. It has bounced fairly solidly off the US$0.6840 line three times over the past few days.

• ASX: The ASX has finished very strongly given the Chinese data miss, gaining 0.9% to close above 4900. Strong buying in the banking sector was a key factor behind the move, with four out of five of the banks seeing more than 1% gains on the day.