Market News & Insights
18 January 2018

A Bunch of Chinese Whispers?

Market news overnight was all about China. The world’s second largest economy delivering a number of convincing numbers, with the exception of Retail Sales which was the only figure to miss markets expectation. The economy grew at 6.9% in 2017, signaling its fastest growth pace in two years, and well above the government’s original target of “around 6.5%”. While the figures showed a healthy looking economy on the outside, concerns of China’s local government debt have reemerged. The Chinese government allocated a limit of 18.8trn for local government debt. However additional debt flooded the markets through local government financing vehicles (LGFVs). The total debt figure is largely unknown but such is the concern that China’s insurance regulator banned such schemes. Any relapse on repayments could result in global tremors from the world’s second largest economy, hence will be a key concern for us throughout 2018.

Investors for now appear happy to overlook such concerns, with US stocks continuing to reach all-time highs, with the Dow closing above 26,000 for the first time. The gain here was the Dow Jones best performance since November, and is up almost 8000 since Trump’s election. The S&P also posted a record closing high, gaining an impressive 4.38% this year already. The dollar also continued to bounce higher, with the index up 0.3% at 90.818, taking it 1% above its recent 3 year lows. The economic calendar today is light, with weekly Job Claims and the pick of the bunch.

We spoke at the beginning of the week around our concern over the rising euro, and how the ECB would respond. We have seen several ECB members already trying to talk the single currency lower this week. Today we have ECB’s Weidmann and Coeure speaking, which could provide a possible risk event for the euro. Traders are already getting excited over the potential for the ECB to change their communication strategy at next week’s meeting, but I fear this could be a little optimistic. Euro traders will also be looking to the SPD’s vote on Sunday to see if the party are willing to back the grand coalition. Germany could be heading for new elections or a minority government, neither of which would be a popular choice.

The pound continues to unable to break out of the region around 1.13 (.8850). According to investment banks JP Morgan and UBS, outlook for the pound is to weaken against the euro in 2018, while holding ground against the dollar. UBS data shows the UK slipping to the bottom of the G7 growth table in 2018, where they say it’s likely to remain there for the year.