A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
China Calls for the Cavalry
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Alan Rose Foreign Exchange Head Trader
As the U.S. – China trade war continues to heat up, the Chinese economy has shown no visible signs of any real weakness so far despite the fact that investors have been fleeing the Shanghai Composite Index as it has declined by 25% so far this year. The Shanghai Composite Index is the worst performing equity index among the main global benchmarks.
While global investors have been fleeing Chinese equities as they fear a long and drawn out trade war with the U.S. and a potentially weaker Chinese economy, the Chinese economy continues to show almost no effects from the heightened trade tension and tariffs that the U.S. has imposed on Chinese exports. Chinese growth in Q3 dropped from 6.7% in Q2 to 6.5%, which was slightly below expectations, and is the slowest pace of growth going back to the Great Recession in 2009.
Chinese equities opened down 1.1% piggybacking the weak U.S. closing and prior to the weak Chinese GDP report. Chinese authorities were fearful about a sharp selloff in Chinese equities and sent for the cavalry. Coordinated statements from the central bank, securities watchdog, and regulators all discussed the possibility of more stimulative measures for the economy, that stock valuations were healthy and Chinese fundamentals were strong. They warned against recent “abnormal market fluctuations” and emphasized the “stable financial system.”
Chinese equities quickly reversed course and finished the session up by nearly 2.50% and the Chinese yuan finished marginally stronger. Despite the Chinese jawboning to support the markets, investors remain very concerned not only about the trade war between the U.S. and China but a deeper geopolitical battle between the countries that could have economic consequences and disrupt supply chains across the globe. The White House is dug on this issue and we anticipate that this will be a major theme of the markets for the months and years ahead.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Canada got a double-whammy of negative news this morning. Retail Sales for August came in much weaker than forecast at -0.1% against expectations of a gain of 0.3%. CPI for September fell by 0.4% against expectations of a gain of 0.1%. YoY CPI fell from 2.8% to 2.2%; Canadian interest rates are lower on the session and the Canadian dollar is fractionally weaker. The Bank of Canada meets next week.
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