In the wake of the horrific June Chinese trade numbers, the debate over a China hard economic landing scenario will certainly be louder today.
Exports unexpectedly plunged 3.1% year-over-year, missing expectations for a gain of 3.7%. Imports declined by 0.7%; economists were looking for a 6% increase.
So, why hasn’t all hell broken out in the markets? The Shanghai Composite actually climbed by 2%.
First, there’s the issue of reliability of China’s trade data, which has a long history of not tying out with its trading partners’ data. If you can’t count on it on the way up, you might as well not count on it on the way down.
However, the sharp downward move could is notable because you’d think that any manipulation of data by policymakers would be to the upside.
Second, there are the policymakers, who will likely intervene should things get really bad.
“Though we don’t expect any big stimulus plans, the State Council under Premier Li will try to avoid unnecessary disruptions such as the interbank squeeze in June, and the government may do something on the margin such as speeding up fiscal spending to stabilise growth,” said Bank of America Merrill Lynch’s Ting Lu. “Note Premier Li yesterday in a meeting said that he will not allow growth to slide to below his target. “
A third explanation for the relative calm in the markets could be the fact that it’s already priced in. Indeed, the Shanghai Composite is down 9.4% year-to-date.
Also, investors and traders have recently loaded up on their short positions.
Here’s Morgan Stanley’s Rashique Rahman in today’s Global EM Morning note:
Little market impact from weak China data: Chinese exports for June came in much weaker than our and consensus expectations, having declined by 3.1%Y. In addition, imports declined by 0.7%Y given sluggish domestic demand and import price deflation, as pointed out by our economists. While this data are clearly poor, they have had a marginal impact on EM currencies – indicative of the already heavy short positioning across the asset class. Such favourable technicals formed the main rationale to our recent change in stance on EMFX from Reduce to Hold, while the weakness in the data adds to our more bearish medium-term outlook for EM assets.
In the U.S., futures are going nowhere. Dow futures are up 3 points. S&P futures are down 1 point.
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