Markets update: Soft macro data alleviates concerns over aggressive tightening

Today’s publication of key macro data from some of the world’s most important economies have been far from impressive, underscoring key central banks’ cautious approach about normalising monetary policy. The euro, pound and Aussie have all fallen on the back of soft data from the Eurozone, UK and China, respectively. Stock markets on the other hand have been able to extend their gains as the weakness in data reduces the possibility of aggressive tightening from central banks. The equity markets have been boosted further by slight de-escalation of war of words between Russia and the West, regarding the situation in Syria, after US President Donald Trump decided to reject a fresh round of sanctions set to be imposed against Russia on Monday. As concerns over retaliation from Russia eases, crude oil prices have pared back some of their gains made last week amid fears over disruption of supply in the region. Meanwhile company earnings results from the likes of Goldman Sachs and Netflix have beaten expectations, further fuelling the equity market rally. In a nutshell, it is “risk-on” today.

Chinese industrial production growth slows down

Although the Chinese economy expanded by 6.8% in the first quarter as expected, industrial production grew only by 6.0% year-over-year in the first three months of the year, down sharply from 7.2% from the same period a year earlier and disappointing expectations for a 6.4% reading.  The slowing down of economic expansion has allowed inflation in China to cool in recent times, while lending volumes have also fallen. Consequently, the People’s Bank of China today decided to cut the required reserve ratio by a whole one percentage point, bringing the ratio for the country’s six largest lenders down to 16%.

German investor confidence takes a hit

Meanwhile economic growth in Europe has also slowed down in recent times, especially in Germany. The Eurozone’s economic powerhouse suffered a sharp drop in confidence, according to the closely-watched ZEW survey of about 300 German institutional investors and analysts, which was released earlier this morning. At -8.2 in April, the index has dropped to its lowest level since November 2012, down sharply from 5.1 recorded in March. As well as concerns over a potential trade war, ZEW’s President Achim Wambach said that the downturn is due to a “significant decline in production, exports and retail sales in Germany in the first quarter of 2018.” The soft ZEW reading caused the EUR/USD to turn sharply lower this morning as it fell about 70 pips from its earlier highs of around 1.2410.