Risk-on sentiment vanishes, Chinese data disappoints

Summary:

• Asian stocks slide along with Antipodean currencies on fading risk-on sentiment

• A package of Chinese data disappointed

• Italian next year’s budget still roils market participants

Below the bar

The past hours brought a bunch of macroeconomic releases from China and Japan and most of them proved to be rather weakish suggesting that economic activity is slowing down. Beginning with the world’s second largest economy we got monthly releases of retail sales, industrial output and fixed asset investments for November.

November brought the two disappointments and the single upbeat sign from the Chinese economy signalling that growth is expected to moderate in months to come. Source: Bloomberg, XTB Research

Retail sales rose 8.1% YoY missing the consensus set at 8.8% YoY and making a meaningful decrease from the previous month when it grew 8.6%. Basically, it was the slowest pace of growth since May 2003 mirroring the fading domestic demand as the authorities have been trying to crack down on undue leverage. The details showed that auto sales dropped 10% YoY and this slump was in line with the earlier data released by Chinese top auto industry association producing a 14% decrease in annual terms. Going forward, industrial production grew 5.4% YoY and also fell short of the median estimate of a 5.9% YoY increase (the same rate of growth was marked in October). The detailed data showed that steel output fell to its lowest level since April this year. Earlier this month we got the trade data showing the slumping Chinese imports of key commodities from copper to iron ore highlighting economic weaknesses and the continued slowdown in activity. The sole bright spot today came from fixed asset investments as they picked up 5.9% YoY on a year-to-date basis beating the estimate of a 5.8% YoY rise. Delving into this data one may notice that infrastructure investments rose 3.7% YoY during the first eleven months which was the same pace of growth compared to the first ten months of this year. In turn, private sector investments increased 8.7% YoY, a slight decrease compared to a 8.8% YoY rise in seen at the end of October. Note that the private sector accounts for roughly 60% of total fixed asset investments in China. By and large, Chinese economic growth is slowing down and the trade battle with the United States is undoubtedly not helping. Some signs of this slowdown have already arisen and if these trends continue unfolding in months to come, it could weigh on assets such as Chinese equities, Australian dollar, and other EM Asian currencies. In the morning we are seeing a noticeable sell-off in the Australian dollar and other risk-related assets. For example, the Shanghai Composite is declining 1.15% while the Hang Seng is going down 1.7%. The NIKKEI closed 2% lower while the Australian benchmark gave back 1%.

The Aussie is trading virtually 1% down on the day while the kiwi is falling 0.6% at the time of writing. Source: xStation5

Italian budget

This week could mark a turning point when it comes to the Italy’s battle with the EU over the 2019 budget. Two days ago the Italian government submitted the revamped budget draft to the European Commission containing a deficit target of 2.04% of GDP instead of 2.4% seen earlier. While it could be seen as a significant concession made by the Italian government, it could turn out not enough to convince the EC to approve this budget. The morning reports from Italian local newspapers say that the two sides are reportedly 0.25% apart on a budget deficit target meaning that the EC wants to see the projected deficit below a 2% threshold. The budget talks are expected to go until Sunday, hence a final resolution could be achieved yet this week before the market opening on Monday. These comments are weighing on the shared currency to some extent and are expected to dent slightly the Italian bond market.

The euro is trading 0.1% down on the day this morning and the recent comments regarding the Italian budget are not helping. The two technical levels to watch are 1.1330 and then 1.1300. Source: xStation5

In the other news:

• Japanese Tankan indicators for November turned out mixed, the index for large manufacturing companies stayed at 19 while the index for outlook dipped to 15 from 19; the index for non-manufacturing large companies rose to 24 from 22 while the index for outlook declined to 20 from 22; the outlook deteriorated in case of small manufacturing forms as well

• Japan’s preliminary manufacturing PMI for December ticked up to 54.2 from 54.2