China trade dampens sentiments

As we expected, risk rally fizzled out in Asia today, which was due in large part to weak Chinese data. Majority of regional indices were lower, with ASX 200 and Nikkei down -0.6% and -1.1% respectively. The STI was also under pressure, although remained defended by the 3000 level.

Hong Kong Victoria Harbour
Source: Bloomberg

Knee-jerk reaction to better-than-expected Chinese export reading quickly gave way to the realisation that overall trade numbers still signal weakness in global trade. Although I was half-expecting talks of more stimulus to spread through the markets, boosting prices. Clearly, there was no such speculations.

The CSI 300 closed down mildly at 0.1%, after surging 7.7% in the previous three sessions after the one-week break. The Hang Seng Index slipped 0.7%, dragged lower by a 1.3% fall in H shares.

The AUD/USD retreated from mid-0.73 ahead of the China trade data, and extended sharply lower after the sluggish Chinese imports reading, pulling below 0.73. The pair has since retraced to low-0.73 levels, although still lower on the day, which snapped its nine-day winning streak.

Nonetheless, there are still several things which are positive for the Aussie dollar. We have RBA signalling a pause in further easing for this year, the delay in Fed rate hike, and recovering commodity complex.

In dollar terms, exports shrank -3.7% y/y in September, when the market was looking for a -6% drop. However, imports contracted more than expected at -20.4% y/y, deeper than the consensus of -16%. This saw the trade surplus coming in at USD 60.34 billion, little changed from the previous month. The sharp fall in headline imports suggested that domestic demand may have fallen off some in the last month.

But weak global commodity prices may have distorted import values, as import volume are holding up. Meanwhile, the upside surprise in exports may be explained by increased foreign demand ahead of the October’s golden week holiday. Overall, the outlook for China’s export sector remain dim, as reflected in the soft Chinese PMI readings.

Meanwhile, investors may also be looking ahead to US Q3 earnings season, where three S&P 500 companies, Fastenal, Johnson & Johnson, and Intel Corp, will be reporting their profits.

 

Singapore may see a technical recession

MAS will hold its semi-annual monetary policy meeting tomorrow, 14 October, where the advance estimate of Q3 GDP would be released at the same time as the policy decision. According to a poll conducted by Bloomberg, majority of analysts (64% of 25) expect the Singapore central bank to ease the current policy stance.

Those anticipating more easing cited worsening economic performance and low inflation as the main factors prodding MAS towards a policy loosening. For our view, please refer to this write-up. In short, the decision is expected to be a close call.

Meanwhile, the median consensus for Singapore’s preliminary Q3 GDP is at -0.1% q/q seasonally-adjusted annual rate, which will put the island state into a technical recession, following Q2’s -4.0% q/q drop. However, the forecasts put forth by 16 economists ranged from -1% to +2.5%, with 9 expecting a contraction.

The STI tested below 3000 in late Tuesday, probably due to jitters ahead of the MAS meeting and the GDP release, as well as China trade numbers. I mentioned earlier that the sharp rally in Singapore stocks in recent sessions was suspected, and it would be a matter of time before the upward move runs out of momentum. USD/SGD continued to trade sideways within 1.3950-1.4050, and tomorrow’s event/data risk will likely impact the pair.

 

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