IG Markets - Afternoon thoughts July 10

Across Asia, regional markets are mostly lower after another session of European and US losses premised on global growth concerns and insufficient central bank policy response. The Shanghai Composite is the region’s worst performer, lower by 0.5%, while the Kospi and the Hang Seng are weaker by 0.4% and 0.3% respectively. Elsewhere, the Nikkei is bucking the trend to be 0.3% higher.

In Australia, the ASX 200 is currently 0.6% weaker at 4094, right on its lows of the session. Losses on the day are relatively broad based but are being led by the materials sector, which is suffering after monthly Chinese import growth slowed more than expected. The heavyweight financial and energy sectors are also seeing modest losses, while the defensively-postured telecoms, utilities and healthcare sectors are among the day’s best performers

What started off as reasonable gains for the local market, quickly turned to a slide into negative territory after the release of China’s monthly trade balance figures. The data revealed China’s surplus at a three-year high of $31.7 billion courtesy of weaker-than-expected import growth. The weak import growth (6.3% versus consensus of 11%) adds fuel to the argument of slowing investment and domestic activity within China, which had a predictable negative impact on the share prices of our major miners. The slightly stronger-than-expected export growth (11.3% versus consensus of 10.6%) was tempered by a sharp decline in the forward-looking new export orders.

The question now is what will be China’s policy response? New leadership takes the reigns in October and the incumbent leaders will no doubt be determined to hand the country over in good health. We’ve already had 2 rate cuts in the last month and yesterday’s highly benign inflation data affords plenty more room for further accommodation. While Friday’s GDP print is backward looking, a softer-than-expected number will no doubt cause some panic in certain corners of the market which may in turn elicit an even more aggressive response from Chinese policy makers. With Europe in the ‘dog house’ and the US economy stalling, the market needs to see, for its own confidence, a healthy and flourishing China.
www.igmarkets.com.au

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