Disappointing China data exposes volatility

Today was the first chance investors had to react to China data released over the weekend which exposed volatility in China’s export growth yet again.

There have also been some interesting moves in the yuan after China set the yuan reference rate at 6.1312, up 111 points. Perhaps this is to try and boost exports after the sharp disappointment on Saturday.

The onshore spot opened much higher leaving analysts wondering whether it is intervention or a knee-jerk reaction to the fix. China posted a 23 billion deficit on Saturday; a sharp drop from the 31.9 billion surplus recorded in January and also well below consensus. There was a sharp 18.1% decline in exports and some analysts feel this is a Chinese-New-Year-related distortion. However, the 10.1% year-on-year import growth could signal increased activity is on the way.

Import growth was quite significant in copper, natural rubber, fertilizer and airplanes. China’s CPI was also slightly below consensus at 2% with lower food price inflation being the main reason behind the fall. This is not necessarily a problem as it allows the PBoC to remain fairly accommodative.

As a result, the selling actually accelerated as soon as Chinese markets came on line with sharp drops for the Shanghai Composite and Hang Seng.

Sharp drop for iron ore

In a sign that China concerns are dominating trade in Asia, steel rebar futures have dropped around 3.2% through June 2013 lows and iron ore futures have declined nearly 4%. This has really rocked confidence in the region and resulted in 1% plus drops for most of the major bourses.

With resources not getting much love at all in Asia, materials sectors are generally leading the weakness across the boards. Pure iron ore plays are the worst hit, with sharp drops for the likes of Rio Tinto and Fortescue Metals.

Talk around China’s growth target started again today with reports suggesting a 7.5% GDP growth rate is guaranteed. Perhaps these comments are aimed at calming some fears after the disappointing data from the weekend. Focus will remain on China this week with new loans, industrial production, fixed asset investment, retail sales and foreign direct investment all set to be released.

Many analysts are expecting credit growth to cool after having seen strong growth recently. This could be another source of concern later in the week.

Safe-haven appeal could benefit yen

The Nikkei never got a chance to celebrate Friday’s positive non-farm payrolls reading which had driven USD/JPY significantly above 103.

Risk aversion could accelerate if the Ukraine situation escalates further. Russia continues to increase its presence in the Ukraine despite opposition by the international community. Ukraine is also set to hold a referendum on 15 March and this could see the investment community reluctant to push risk higher. In such an event, USD/JPY could very well drop back below 103 in the near term with the yen regaining some ground.

In the background we’ll have the BoJ meeting on Tuesday which should bring interesting commentary as we head into the implementation of the sales tax hike.

Relatively flat start for Europe

Looking ahead to European trade, we are expecting mild gains for the major bourses at the open.

The drop we are seeing in materials names will likely impact the FTSE the most given it has a fairly big resource presence. On the economic front, focus will be on French and Italian industrial production.

Eurogroup meetings also go ahead and I wouldn’t be surprised if they are taken over by Russia/Ukraine concerns which is a hard issue to ignore at the moment.  In the UK MPC member Bean speaks and this could result in some sterling movement while the US is in for a quiet session on the economic calendar.

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