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Relying on the Asian economies to fuel global growth

17 January 2012  •  Source: Simon Denham, Capital Spreads

China has proven today to some degree that the argument between a soft and hard landing is slowly being won by the soft camp. Their GDP figures overnight were always going to be a focal point of trade today as we remain heavily reliant on the Asian economies to fuel global growth so when the number came in at 8.9%, higher than the expected 8.7% it took the market a little by surprise and resulted in a strong rally for base metals which has followed through to mining stocks so far this morning.

Previously in this comment we have noted that China is very different to Western economies and therefore thinking. With their considerable reserves they have the firepower to bring things down slowly if they want to and for now the plan seems to be working. With the world’s second largest economy still growing near 9% the prospects of a global recession are limited, even if things in Europe continue in the fashion they are going.

The increased optimism in equities seen throughout this year is very encouraging for the outlook in 2012. The old statistic that the equity market will have a positive year if the S&P finished higher after the first five days of trading is certainly looking to play out, although it is VERY early days!

At the time of writing we are calling the Dow to open higher by 120 points from its close on Friday, so it will be interesting to see whether that can be maintained when US investors get back into their offices later this morning after their long week end. Often you see that US futures don’t like being led by European markets and can reverse their move, however this time round the rally might be sustained simply because of the GDP data from China. Currently the Dow is marking a near 6 month high.

Clients remain sceptical however presumably with the belief that the eurozone woes will rule. Selling into the recent strength has left them nursing a few wounds this morning.

Economic data starts to pick up again today with CPI numbers from the UK. The year on year figure is due to decline from 4.8% to 4.2% mainly due to the fact that last year’s VAT hike has now come out of the figures. Expectations continue to point to further declines in the rate which will be most welcome for the UK consumer.

The euro has managed to rally this morning on the back of equity markets moving higher and increased risk appetite and comes as quite a surprise, going against the trend considering the news for the single currency hasn’t been good at all. S&P followed on with their ratings cuts of countries to cut the credit rating for the eurozone’s “big bazooka” fund. Despite the rally this morning, we could very quickly see this unwind, especially if the other major credit rating agency Moody’s comes in with the cull. The EUR/USD pair are trading at 1.2752 currently and traders going long of the market should be cautious here.

Gold’s price was boosted yesterday by a slightly weaker greenback as risk adverse investors searched for an alternative safety haven for their assets. Unfortunately, with low volumes due to a US holiday, the boost was not one worth shouting about and by the end of the session the yellow metal had only gained 4.7 dollars to end at 1643.4. At time of writing though, it seems that the Yanks feel they missed out on the small rally and are catching up as the precious metal is up at 1660.6.

Grasping little direction from the equities markets, crude turned to the single currency for guidance, jumping on the back of a market rally. Not only this, but after looking at the tensions between Iran and the West, investors appear to feel that a decline in prices is a good opportunity to go long. Currently, Brent trades up at 112.15.

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