Asian equities head lower in anticipation of trade talks

Summary:

• Stock markets in Asia remain under pressure ahead of US-China trade negotiations starting in Washington on Thursday
• China’s CPI moves up in April, food prices jump on soaring pork prices
• RBNZ’s Orr uncertain if another rate cut needed

Low expectations

Although the US stock market finished Wednesday’s trading only slightly lower, Asian investors shared much more downbeat moods in anticipation of trade negotiations beginning in Washington today. In terms of the US earnings season it is worth mentioning a financial report of Walt Disney. The company showed EPS of $1.61 for its second fiscal quarter, beating the median estimate of $1.58. In turn, overall revenue was $14.92 billion while the consensus had pointed to $14.54 billion. The stock jumped in after-hours trading around 1% in response to the released values. Looking at Asian markets one may notice that expectations before US-China trade talks are pretty low. The Shanghai Composite is falling 1.3%, the Hang Seng (CHNComp) is declining 1.7% and the Korean KOSPI is down 1.8%. Overnight we were offered a report from Financial Times suggesting that the United States will not impose increased tariffs on imported goods being in transit and these higher tariffs will only affect those goods departing from China since Friday. The newspaper adds that taking into account the latest information from the White House it means that both countries will have two to four additional weeks to reach an agreement “before the bulk of the pain from the higher tariffs directly hits the US consumers and businesses”. This takes into consideration shipping times between the two countries. While it could be a slightly positive information for US firms and consumers, it does not change expectations ahead of another round of talks in Washington. In general, these expectations are very low and striking any deal by Friday to avoid higher tariffs seems to be highly unlikely.

Technically the Hang Seng is breaking below the 50% retracement of the latest leg higher. A successful breakdown could allow sellers to push toward the area of 10580 points. However, there is no doubt that any incoming revelations from the US may notably affect Asian equity markets. Source: xStation5

Pork prices push food prices higher

Chinese consumer inflation for April rose to 2.5% in annual terms from 2.3% in the previous month, matching market expectations. Nevertheless, what is worth attention are food prices rising 6.1% from a year ago, up from the pace of 4.1% seen in March. The prime reason for such an increase were pork prices soaring 14.1% in annual and 1.6% in monthly terms. This surge is attributed to an outbreak of Afrian swine fever in China and neighbouring countries. The problem is serious as China is the world’s largest pork consumer as well as producer, hence a shrinking number of pigs there is forcing the country to import more, pushing the prices higher globally. Let us note that China’s pig herd declined 13% YoY in the first month of this year, and since then the trend has not reversed. At the same time, producer prices rose 0.9% in annual terms compared to 0.4% in March and above the median estimate of a 0.6% increase. In our view, the strong spike in food prices is driven mainly by a supply side, hence it should not significantly affect other parts of the economy (it does not mean higher demand in the economy). This is especially true when we take into account the slowing economic growth in China which will be generating less inflationary pressure.

Pork prices contributed to a big increase in Chinese food prices in April. Source: Bloomberg

In the other news:

• Chinese new loans for April were 1020 billion yuan, down from 1690 billion yuan in March and below expectations of 1200 billion yuan; M2 money stock ticked down to 8.5% from 8.6%

• RBNZ’s Orr said it was too early to tell if another rate cut was needed, adding that if the cash rate was left at 1.75% employment would have slowed

• Theresa May’s office said that the second round of talks with Labour indicated a serious approach by both sides, both parties are to meet again at the start of the new week