Chinese growth once again in the limelight

Chinese growth has once again hit the limelight, although traders seem to be taking it rather well.

With Chinese Finance Minister Lou Jiwei detailing that a 6.5% growth rate would not be a major issue and that the Tiger economy should achieve 7%, you may have thought the CSI 300 and Shanghai Composite would come under downside pressure, but a 0.3% fall in both seems very orderly.

Certainly this is not a new story and it’s well known that the PBOC and the ruling party are happy to accept slower growth, with a keener focus on reforming the banking sector. In fact there was already a view that Premier Li Keqiang would look to use the March 2014 National People’s Congress to cut the target to 7% anyhow. We’ve already heard from the Premier Li proposing some policy easing in certain areas, including speeding up shanty reconstruction of eight million homes by 2017, as well as targeted railway and infrastructure projects. It’s this investment-focused approach which should provide a buffer during the transmission to more consumption-led growth, while significantly deleveraging the banking space.

We are still keeping an eye out for June new yuan loans (expected to increase to RMB800 billion) and M2 money supply, which importantly is expected to fall from 15.8% to 15.2%. The PBOC is targeting 13%, so clearly a number below consensus should be taken well by the market. Q2 GDP (expected at 7.5%) is out next week, and while this is a backward-looking indicator it will carry weight for the likes of copper, commodity currencies and other risk assets.

Japan has seen more subdued trade, with the index moving in a more modest 157 point range. We still hold the view that Japan is improving, domestic players are buying foreign bonds (notably German bunds), while July 21 should see the LDP party take control of the Upper House allowing the smoother passage of future reforms. USD/JPY however seems range-bound and a little in need of a push in one direction. While range trading can be a profitable, we always prefer trending markets and believe this greatly increases positive expectancy, which ultimately (along with risk and money management) is what trading is all about. The fact that the pair has tested, but failed to close below the 38.2% retracement of the June to July rally at 98.56 is positive and could signal that the pair is ready to head higher; with the MACD above the zero line we feel a move back above 100.00 could be on the cards in the short-term.

The ASX 200 has put on a further 0.4%, with material names again finding good buying activity and not being too affected by the China Finance Minister’s comments. With the Fed providing a more supportive landscape and doing a fantastic job in separating the market’s view of an early tapering and a rise in the Fed funds rate, a more supportive backdrop has been provided for emerging markets and commodities (at least from a speculative stand point), and traders and investors are starting to look at the sizeable discounts to NPV (net present value) and feeling that the coming production report season could provide the clarity needed to realise this value. It’s been a shocking confession season thus far, so perhaps if you’re a shareholder of a company who hasn’t already cut guidance, then perhaps you’re coming out the other side in good shape. There is also a view that the lower AUD should start appealing to investors ahead of the August earnings season. Still, there have been some very strong moves in this space, and while clearly assisted by short-covering there is no denying real buying is occurring as well.

The index looks set to close the week with a gain of around 3%, which the bulls will take any day. The failure to close above 5000 is interesting, however technically today’s high of 5012 is the exact 61.8% retracement of the May to June sell-off, and the rejection of this level will also please the bears. A close above here going forward though would mitigate this negative development and would be very positive from a momentum point of view.

European markets look like they will open in much more subdued fashion as well, and after all the this week’s drama, traders will probably have one eye on the price action and another on the cricket. On the data side the University of Michigan confidence print should see a good improvement, which would be positive as it falls at a time when bond and subsequently mortgage rates were on the way up. Earnings from Wells Fargo could give the other side of this stand point as traders look at mortgage banking trends and the mortgage pipeline outlook, at a time when mortgage applications have started to fall.

JP Morgan will also be of interest, with the market expecting Q2 (adjusted) EPS of $1.45, on revenue of $25.05 billion. The company has fallen on three of the last five days of earnings, and a good number is needed for the stock to break the key $55.90 level. Of course the other area which will separate them from WFC to a bigger degree is trading revenue; while most expect a fall in FICC and equity trading on the quarter, both metrics should still be higher than a year ago.

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