IG Markets - Afternoon thoughts July 13

Across Asia, regional markets are broadly higher after China’s GDP data wasn’t as weak as the market had feared. The Kospi is the region’s best performer, higher by 1%, while the Hang Seng and the Nikkei are 0.5% and 0.3% firmer respectively. The Shanghai Composite, having initially rallied after the GDP release, is now flat.

In Australia, the ASX 200 is currently 0.6% to the upside at 4091, having earlier hit a high of 4103. After a sluggish start, gains for the local market accelerated after Chinese GDP data came in at 7.6%, broadly in-line with official consensus numbers, but well ahead of the feared doomsday whisper numbers that had been circulating of something sub-7%. While the materials and energy sectors have moved into positive territory, the best performers on the day are the property trust, utilities and financial sectors.

This morning we wrote... ’Only once the number is released will we be able to make the call whether yesterday’s selling was justified or an overreaction. Also, perhaps more important than the number itself (which is a backwards looking indicator) will be the response of Chinese policy makers. We have already had two rate cuts in the last month, which will still be working their way through the system, but there could also be more on the cards.’ With the actual number coming in at 7.6%, it seems there was a collective sigh of relief around global markets with short positions established over the previous 24 hours being quickly unwound. Oversold materials names rallied, as did commodities and equity futures.

So where to from here? China is not going to fall off a cliff. It was never going to. The whole hard landing/soft landing debate is nothing but a pointless financial media driven fascination. China’s fortunes, like that of the rest of the world, are not black and white, they are grey. What does seem clear is that China’s policymakers are not going to sit back and let their economy slide too appreciably. It is often forgotten that this recent slowdown has been an orchestrated one. It has been intentional. It was necessary as China’s inflationary pressures only a year ago were running at north of 6%. This week’s CPI print was 2.2%. Mission accomplished. China now has the room to re-stimulate its economy which it has already begun doing with two interest rate cuts over the last month. Maybe it’s time the market took a chill pill and began to relax a little over China.

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