While traders had a very positive initial reaction to China’s major stimulus announcements in late September, it seems they are starting to reverse course. The rise in enthusiasm for Chinese investment has been mirrored by a drop in the last few days. Now the question is where things go from here.
The stimulus announcement led to the best stock market performance in China since 2008. But after the Asian giant came back from its week-long holiday, where investors had a chance to digest the news, China-based stocks had the worst single-day performance since 2008 on Wednesday. Has the effect of the stimulus entirely faded?
The Disappointment and Potential Rebound
Part of the issue was that there was a lot of expectation in the lead up to a press conference called by central Chinese authorities for last Tuesday. Markets were expecting a follow-up of the stimulus measures. But the announcements decidedly underwhelmed, and the stock market tanked.
Now, China’s Finance Minister has called for a new press conference on Saturday. Cautious expectations have returned, as the economic calendar is setting up to produce a lot of market sensitive news over the weekend. On top of the uncertainty over what Chinese authorities might announce in terms of more stimulus, is the release of China trade balance for September.
What the Data May Say
The stimulus announcement was late in the month, and likely won’t have an impact on the trade data. But it could be a key barometer for the state of not just China’s economy, but for the world. Trade has been resuming over the last few months, with both exports and imports posting growth. That is, despite the proliferation of trade restrictions and tariffs, as both the US and the EU have escalated their trade stand-off with China.
Markets are likely looking for solid growth in Chinese trade to be reassured global demand is intact, which will be crucial for commodity currencies. China’s September trade surplus is expected to decline to $82.0 billion from $91.0 billion a month ago. That is because imports are expected to accelerate, while exports slow their pace. Imports are seen at +1.0% compared to 0.5% prior, while exports return to 7.0% growth compared to 8.7% prior.
Convincing the Markets
In a sign of market perception beyond the headlines, commodity prices have generally declined through the course of the week. This is particularly notable for both crude and copper. Crude, because China is the largest importer and needs diesel in particular to support industrial growth. But the decline in copper – which is vital for housing growth – suggests that Chinese industrialists don’t expect a substantial improvement in building in China. And housing is the main issue dragging on the economy.
Of course, an announcement of substantial stimulus coming over the weekend might reignite investor interest, and push commodities higher along with their currencies. But, so far, the euphoria of the stimulus seems to be fading, and investors are looking for convincing signs of a sustained turnaround in the world’s second largest economy.
