Will China be able to sustain its momentum? Oct. 18 2013

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Global stock futures continued its ascent as Chinese gross domestic product expanded at its fastest pace in the third quarter. China’s growth accelerated to 7.7% from 7.5% the previous quarter, coming in line with consensus. Much of the growth resurgence can be attributed to government-backed stimulus measures in infrastructure investment and a soft recovery in exports.

Tempering the optimism was the release of industrial production, retail sales and urban investment for the month of September that showed a broad easing of the economy. September industrial output eased to 10.2% from 10.4% in August, while retail Sales and construction activity slowed to 13.3% and 20.2% respectively.

The question now is – will China be able to sustain its momentum as we head into year end? China is likely to face some headwinds as deleveraging in the shadow banking sector will hinder overall credit growth, which could diminish investment growth in the next few months. Money supply in September, compared to a year ago slowed to 14.2% from 14.7%. The People’s Bank of China is likely to refrain from further expanding its fiscal stimulus and maintain a neutral stance amid rising home prices and inflation rate in light of maintaining stability.

Albeit the improvement in risk appetite in stock indices, the focus going forward for markets will be dominated by the Federal Reserve, nonfarm payrolls and budget negotiations between Republicans and Democrats. The 16 day shutdown of the US government and its negative impact on US growth coupled with fiscal uncertainty could possibly push tapering to December at the earliest or first quarter of 2014.

The majors traded in a narrow range in the overnight session with the greenback declining to an 8 ½ month low. The dollar index fell to 79.478, its lowest since February as traders sell the dollar in lieu of other advanced and emerging economies. The benefactors undoubtedly have been the euro and the pound with the euro currently trading at the 1.3680 level and are setting its sights to test the 2013 high of 1.3711. With the lack of fundamental releases in Europe, the euro is likely to focus on broader market themes. A close above 1.3680 could bring forth 1.3728, followed by 1.3793. On the downside, support is located at 1.3524, 1.3560 and 1.3521. Cable, on the other hand, has lost a bit of its steam and has pulled back below the 1.6200 handle as Bank of England was quoted that it’s “very unlikely” that the central bank will raise interest rates in 2014. At time of writing, GBP/USD is trading at 1.6182 area with resistance seen at 1.6287, 1.6327 and 1.6368 while support lie at 1.6051, 1.6011 and 1.5971.

As we head into the North American session, the Canadian dollar is softer attempting to have a sustained break below 1.0300 as inflation continues to lag behind the 2% target set by the Bank of Canada. Consumer Price Index for September came in at 1.3%, slightly below the forecast of 1.4%. An important driver for the loonie has been capital market flow into Canada and with global FX reserves continues to rise; the Canadian dollar should benefit and limit its 2014 weakness. There is no other tier one data on deck as we round out the trading week and focus will turn to earnings reports and Fed speeches from Tarullo, Evans, Dudley and Stein later in the day.

By Cheryl Girling of Cambridge Mercantile Group

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