Turn over any major market development this morning, and you’ll find “Made In China” stamped on the bottom of it. Sentiment on the world’s second largest economy underwent a dramatic reversal over the weekend after Premier Li Kiqiang suggested that the government was preparing another round of stimulus. In comments after a speech in Northern China, he said “We have gathered experience from successfully battling the economic downturn last year and we have policies in store to counter economic volatility for this year”. He suggested that infrastructure spending would ramp up, saying “We will launch relevant and forceful measures according to what we have planned in our government work report”.
In response, traders are bidding raw materials up on a global basis, positioning ahead of an expected jump in demand. Commodity-bloc currencies like the Canadian, Aussie and Kiwi units are all strengthening – reversing trends that have been effectively unstoppable since the year began,
In contrast, the dollar and euro are on the defensive. The yen is the worst performer among the majors, falling after major corporates rebalanced their portfolios on Thursday, at the end of the Japanese trading year. 105 beckons.
We would suggest that market participants remain cautious. Despite boundless Western faith, China’s policymakers are not omniscient or all-powerful. Over the last five years, the government’s ability to generate growth has become extremely strained. An ever-increasing reliance on credit hasn’t translated into improving fundamentals, and the multiplier effect associated with infrastructure spending has diminished over time. This round of stimulus is likely to be both more cautious and less effective than the 2009 iteration, meaning that the longer-term impact will almost certainly be smaller. In other words – position for optimism in the short term, but protect against a reversal in the longer term…
Further reading:
EURJPY: Follows Through Higher, Eyes Further Strength
Weekly overview (24 -28 March 2014) Indices rise in Europe; what to expect this week?
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