Slightly softer stocks and a move back into the yen illustrate the move away from 'risky' assets this morning. News that CIT probably will not receive a government bailout is a reminder that this recession could yet claim further victims and is primarily responsible for this morning's cautious tone. Data showing that China managed to grow by 7.9% y/y in Q2 is supportive for the global economic outlook though a leak of the report in a Chinese newspaper and the fact that it came in close to the market median ensured little market reaction. The NZD tanked overnight on news that Fitch has changed the country's credit rating to negative from stable.
The strength of Chinese economic growth in Q2 will encourage speculation that the Asian region will be a primary driver of the global economic recovery. Singapore grew by 20.4% q/q saar in Q2 (-3.7% y/y), while Korea and India are also expected to post good data for Q2. Today's Chinese data follow yesterday's report that China's reserves rose by a staggering USD178.3 bln in the Q2. This huge boost has been linked to a rise in speculative interest also reflected in the fact that Shanghai composite index has registered gains of 75% in the year to date. This week's Chinese data have re-established talk that China may again have to revalue the renminbi. However, a breakdown of the GDP report continues to show weakness in the export sector in reflection of weak demand in the developed world. Until demand in the US and Europe recovers the Chinese authorities are likely to side step the issue of revaluation. While the rapid accumulation of reserves in part explains some of the motivation behind China's ongoing questioning of the USD's dominant position as reserve currency, the mammoth amount of reserves also suggests an increased interest in China supporting the US Treasury's strong dollar policy. Treasury Secretary Giethner is today visiting Paris.
News of that Fitch has lowered New Zealand' credit rating came out of the blue. The news clearly raises fresh concerns for the government. However, the strong sell off in the NZD will not be wholly unwelcome. Both the government and the central bank this week have called for a weaker NZD. NZ Q2 CPI overnight registered just 1.9% y/y, down from 3.0% y/y in Q1. This is the lowest rate since Sept 07 and supports the official calls for a weaker exchange rate.
USD/NZD fell to 0.6388 overnight before finding buyers. AUD/NZD surged on the news, rising to 1.2500 before falling back to 1.2420.
This afternoon US initial claims data will be watched. TIC data, the Philly Fed Index and the NAHB housing index are also due.
