All eyes on the Chinese Dragon

The final piece of the China Q1 puzzle falls into place today – GDP.

Source: Bloomberg

China’s new loan data was released overnight. In a word, it was muted, with just a slight increase in new loans in March to CNY1180 billion. After Monday’s trade balance read, expect this figure to shift in the coming months if GDP shows similar weakness.

The consensus GDP estimates for Q1 year-on-year remain at 7.0%. However, there are plenty that see a 6 handle in the figures today (the lowest estimate is 6.2%, the highest is 7.8%). The question currency and equity markets will ask themselves is whether bad news will be seen as good news from a stimulus standpoint?

The market pricing suggests this would be the case – the majority of analysts see further loosening to fiscal and monetary policy in the form of lower reserve requirement ratios, a lower CNY, lower market and benchmark interest rates, further fiscal support and pressure on local administrations to act in their respective jurisdictions.

What I need to also point out is the divergence forming between the Chinese economy and the Chinese market and the fact the market has been completely ignoring what has transpired over the past three years.

On a day like today where trading really won’t start until the markets are clear of the GDP print (due at 12pm AEST), I feel it’s worth pointing out what happened around the grounds last night that might also have a bearing on trade today.

Around the grounds:

- US retail sales recovered from their winter slumber but not as much as the market expected. This is the fourth month in a row that retails sales have disappointed compared to consensus. The read has seen further downside risk to Q1 GDP in the US and further weakness in the USD on the expectation the Fed will wait even longer to move the Fed funds rate.

- US earning season was highlighted last night by JP Morgan – EPS excluding significant items was $1.61 vs consensus of $1.41 – a great beat. JP Morgan themselves suggest comparisons to last year may not be that accurate considering the lawsuit cost and slight changes to accounting practices. However, even including these significant items, EPS was $1.45 – still a good beat. JP Morgan contributed this read to a bounce in equity and bond trading. I reiterate that in Australia my key pick remains Macquarie Group Ltd.

- The Greek saga is coming to a head – concerns are building that Athens is pushing itself to the limit on its debt issues. Negotiations are still ongoing and all public communication states that it will find a solution before the deadline. However, like all political ‘debates’ it will get within days or even hours before the deal is done. Just be mindful that the EUR is likely to experience heightened volatility as the deadline approaches.

- A bounce in the spot iron ore price to above US$50 (US$50.78) may get some trade excitement in a few beaten up ore names in early trade. However, I wouldn’t get suckered into thinking this is the end of the problems here. Juniors are still having to take big haircuts as ore quality is below par at most of these names. Expect a short squeeze but a return to the short-term trend in the coming days and further downward pressure.

- RBA rate cut expectations for May still sit at 70%. A poor read from China will likely see that figure moving higher still. AUD/USD moved back into the 76c handle on the US retail sale. That could reverse at 12pm today.

We are calling the ASX 200 up 13 points to 5959. We are unlikely to see the ASX crossing the 6000 point mark today – it would need a stellar number from China to do that. Interestingly, 6000 wasn’t actually a technical level but it’s fast becoming one. The ASX has flirted with 6000 four times and can’t seem to break it.

Here is a very good chart from my colleague Shaun Murison illustrating the technical pattern forming in the ASX.

Click to enlarge

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