A relatively quiet start to the week from an economic data perspective has investors focusing on the events that transpired over the weekend, none of which provided much support for risk-correlated assets. After the late-day weakness in equities on Friday as a result of the EU’s ultimatum to Greece, Chinese trade balance numbers did little to help inspire confidence that the world’s second largest economy is immune to the global disinflationary winds that are weighing down demand. The transition from an economy reliant on investment capital towards one more focused on domestic consumption is at danger of faltering, worrying investors after imports for the month of January collapsed by 19.9%, far outpacing the 3.0% slowdown that had been expected by economists. The record trade surplus as a result of the breakdown in imports highlights the deepening weakness in the Chinese economy, increasing the likelihood that the Government will lower their GDP target to 7.0% in 2015, along with taking further stimulus measures to prop up waning domestic demand. While economic indicators are eyed with caution around the January and February months due to the shifting nature of the Lunar New Year holiday, this year the new year holiday takes place towards the end of February, and therefore January should have been relatively unaffected. In addition, the slump in imports isn’t solely a consequence of sliding commodity prices, as the overall volume of commodities was soft and raises concern the first quarter could be disastrous if the January figures turn out not to be an anomaly. Despite the pessimistic nature of the trade balance numbers, the Shanghai Comp managed to rebound during the overnight Asian session and posted a gain of 0.62%, while commodity currencies like the aussie and loonie have found supportive bids on the back of positive price action in oil.
Focusing our attention from economics to politics, due to an absence of tier-one economic data set to be released during the North American session, investors will be intently focused on the ever fluid Greek debt negotiations, which at the moment are looking shaky at best. To catch-up our readers on the weekend developments, the new Prime Minister of Greece is failing to blink in response to the EU’s latest ultimatum, refusing to request a bailout extension of the previously agreed upon terms, and instead has demanded the negotiation of a bridge agreement into the summer until a new program can be agreed upon, adding that the new Greek government will make Greece economically autonomous and that the crisis was not just a Greek crisis, but a European crisis. The unequivocal rejection of a request for a bailout extension was further compounded by the statements by the Greek finance minister, who stated that should Greece be forced out of the zone if an agreement can’t be reached, other countries (e.g. Italy, Portugal) will inevitably follow and the common-currency zone will collapse. While we had previously cautioned investors weren’t likely to ignore a long, drawn out debt negotiation battle on the “heads-I-win-tails-you-lose” mantra focused around potentially jettisoning the weakest member of the European Union, the consequences of technocratic austerity are being questioned, with other periphery nations eyed suspiciously by market participants.
As we head into the North American open, S&P equity futures are displaying a red hue that telegraphs a cautious start to the day for equities. The euro is eliciting some interest on the offer side of its book as the Greek debt negotiations hit a wall, pulling EURUSD to the south side of the 1.13 handle. The loonie has managed to shake off the revolting Chinese import numbers, and is seeing its bid lifted as front-month WTI continues its technical bounce and changes hands in the mid-$52s. Housing starts for the month of January in Canada came in slightly higher than expected, helping the loonie claw back some of Friday’s losses post-jobs, and as we head to print USDCAD is pivoting around the 1.25 handle; we feel this area will act as good support moving forward, considering the divergence of monetary policy between the Fed and BoC, and the potential for a Fed rate hike in June and an outside possibility for another rate cut from the BoC.
Further reading:
EUR/USD fails to recover in range on Greek worries
EUR, CAD: Extreme & Not So Extreme Shorts; AUD: Policy Balancing – CIBC
Share
