Chinese trade data slows sharp reduction in activity

Good morning all,

• Chinese trade data slows sharp reduction in activity

• Greek bonds shock markets showing massive demand for peripheral debt

• FMC minutes seen as more dovish than expected

• BoE keep policies unchanged

European markets have sold off sharply this morning, paring the gains seen in yesterday’s session. This is largely expected to feed into the US session, where the S&P500 is expected to open -6 points, Nasdaq -14 points and Dow -56 points.

This selling comes against a backdrop of actually pretty positive data today, where the Chinese trade swung back into surplus, Australian unemployment tumbled unexpectedly, Greek bonds sold above expectations and the Fed struck a somewhat dovish tone with yesterday’s minutes. Thus there are warning signs that show a possible bearish tone creeping back into the markets despite the strength seen within the past two trading days.

The major event of note overnight came out of China, where the latest trade balance brought a welcome return to surplus following a shockingly poor deficit of -$23 billion in February; the worst in 2 years. However, all was not too positive despite this headline figure, with much of it being driven by an -11.3% fall in imports. This offsets the sharp 6.6% reduction in exports, rounds off a worrying trade trend which points to tightening international ties. The ability of the Chinese economy to grow has been tied heavily with their ability to trade in the international market, with imports of raw materials and energy being utilised to generate much of their export growth. With an economy that is showing clear signs of tightening following disappointing manufacturing PMI trends, a recent corporate default and lowered GDP expectations, these figures have come as yet another blow to the Asian powerhouse.

Against this backdrop, Premier Li came out to announce that China will not adopt short term and strong stimulus policies in response to temporary fluctuations in the economy. This willingness to allow market forces to take more of a central role is becoming a growing trend, as highlighted by the default of solar firm Chaori last month. However, there is certainly an element of mistrust when it comes to hawkish Chinese announcements, given the willingness of both the PBOC and Chinese government to undertake strategic supportive measures behind the scenes when weakening has occurred. This also comes with last week’s announcement of stimulus by the government to support small firms and the Chinese rail network.

In Europe, the headlines have been stolen by the Greek bond auction; the first in four years. The 5 year auction went off in style, with investors lapping up the notes despite the lowered yield of 4.95%. Overall, the auction was oversubscribed by 8 times and pointed to a clear return to trust in the nation following a calamitous 2013. Of all the major nations involved within the Eurozone, it is the Greek situation which has proven to be possibly the greatest indicator of why we should all worry about it’s stability. And whilst today’s auction does not mean that the economy is out of the woods, it does provide greater stability in debt repayments and ratifies the current pathway to recovery. The impact seen across the Eurozone as a whole, where yields fell across the board, provides clear evidence of the increased confidence felt within the markets in response to today’s auction.

In the US markets, many are likely to continue to focus upon yesterday’s FOMC minutes release, which have been perceived by many as more dovish than expected. There was no mention of the ‘six month’ or ‘considerable period’ timeframe mentioned by Yellen following the meeting, pushing expectations of a rate hike further into 2015 for many. Part of this is associated with the clear confusion and disagreement surrounding what extent of ‘labour market slack’ exists within the economy. Clearly the forward guidance was utilised to muddy the waters of when we would see a rate rise, yet in doing so there now appears to be a problem in the Fed themselves agreeing on how such slack should be interpreted.

Finally, the BoE kept rates and asset purchases steady yet again this month, as was expected within the markets. The stability set by Mark Carney in setting his forward guidance policy has brought this meeting to somewhat of a standstill and created a somewhat non-event. There is clearly a significant strengthening seen within the UK economy, to the extent that the IMF predicted a 2014 growth rate of 2.7%; the biggest of G7 nations. However, there is also the feeling that the recovery remains fragile and susceptible to shocks in interest rates. Given the negative historical correlation between interest rates and equities, Carney is likely to want to raise rates too soon and too quickly, with the housing and stock market boom at risk.