China may keep the Asian session buoyant today

The markets are finally showing signs of a crack with the US politicians dragging their feet on coming to any type of closure.

One would hope that the world’s most powerful nation – albeit waning – is run by some smart people. The risk-off situation will continue and the slam of tech stocks is just the beginning of what could potentially become a panic sell off in this situation, initiated by political haggling. We are all-too familiar when panic ensues, with how easily anything can exacerbate an already-fragile situation when fundamentals go out the window.

Asian markets

Asian and commodity markets yesterday held strong with China coming back online after a week-long holiday. Prices ran up in the Chinese and Hong Kong equity markets yesterday, led by retailers’ strong retail sales figures during the National day holiday. The commerce department reported that retail and catering sales in China grew 14% during the week holiday, to $142b.

The Chinese consumer buying frenzy is evident in the HK Sotheby’s auction where they made headlines for record sales of rare diamonds, artworks and artefacts, raising approximately 20% more than their initial target of $540m. Commodities such as industrial metals, copper and steel futures moved higher on the basis that traders are likely to start buying after the holidays.

Indian equities were another area that started off strong, after the RBI eased liquidity by cutting the marginal standing facility rate to 9%. However, the rally ran out of steam towards the end of the trading day and ended with a modest gain of 0.4%.

The buoyant sentiment in Asia was not mirrored in the European or US sessions. US investors moved away from risky assets across the board. Asian ETFs felt the brunt of this exit, with selling continuing for a second day with ishares Philippines and India leading the decline, down 2.5%.

The lack of US data means the week’s IIF and IMF reports have been the focal and reference points for the market. Although one may argue that these reports tend to be delayed compared to market sentiment, they sing the same tune when it came to their thoughts on EMEA economies. The agreement that weak growth in emerging markets is structural, and the lack of reform during the growth period means there are challenges ahead, with growth forecasts lowered in this region.

Chinese and Indian growth forecasts

Both China and India had growth forecasts lowered by the IMF. The notable difference is the sharp downward revision for India, from 5.1% to 3.8%, which is below average market consensus, while China is still slightly above market consensus at 7.6%. There is no arguing that if the US growth stalls, the domino effect will mean EMEA markets are greatly affected. Leaders in the APEC summit reiterated this in their joint statement that “global trade is weakening and the economic outlook suggests growth is likely to be slower and less balanced than desired.”

A sign that Asian leaders are looking to move ahead and hedge themselves from the US, China took centre stage with Obama’s no show strengthening economic and political ties with Asian partners. China agreed to triple trade relations with Malaysia - valued at $160b - by 2017, and to become strategic military partners. It is only a question of when and who else China would look to further ties with, given that they are not part of the TPP.

Another indication of short sightedness from the US politicians is the domestic issue overtaking global relations for Obama. This is causing a threat to the timely conclusion of the TPP favoured by the President, which might not be concluded by the end of the year.

In today’s trading, the announcement that Yellen will be officially nominated tomorrow would be seen as welcome news for Asian markets, given her widely acknowledged dovish stance, although the current state of US politics weighs heavily on the market.

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