Market commentary: China and Australia seal landmark free trade agreement

Following what can be described as a lull weak in terms of economic data and activity last week, markets got off to a difficult start this week as European markets woke up yesterday to news which showed that Japan entered a technical recession, with Q3 GDP growth showing a contraction of -0.4%.

This print came well below expectations of an expansion of +0.5%, resulting in an increase in risk aversion towards the earlier part of the session as major European equity markets lost ground. This is expected to remain the theme heading into the New Year; although we have seen some signs of marginal growth in the Eurozone, yesterday we had a negative US data print to contend with in the form of industrial production closing in below market expectations.

Today we have got the German ZEW economic sentiment index which is expected to continue to drive sentiment in already weak markets. Anything short of expectations could result in a pronounced sell-off, a print above expectations will only serve as a breather, for the time being.

In the US on the other hand, we have monthly PPI numbers but more importantly, tomorrow’s release of the minutes of the most recent FOMC meeting and some key housing data to look forward to. We look forward to the language around forward guidance and the assessment of "significant underutilization" in the labour market, which were topics discussed in last month’s meeting.

Furthermore, given the fact that in the September minutes there was no mention on comments on foreign developments, October’s minutes are likely to shed some light on such developments and the Fed’s stance in this regard.

Later on in the day, reports were stating that ECB could be compelled to consider sovereign bond purchases in its attempt to increase the ECB balances to 2012 to an amount of €3 trillion, causing sovereign bond yields to close in tighter towards the end of yesterday’s session.

Having said that, European Central Bank Executive Board member Yves Mersch toned down talks of imminent sovereign bond purchases by the ECB, saying that policy makers need to wait and see on developments on incoming data. Nevertheless, he reiterated that sovereign bond purchases could be possible, along with purchases of gold, exchange traded funds or stocks, underlining that the ECB still has a broad array of assets it could buy if it deemed such unconventional measures were necessary.

Meanwhile, a recent survey published in Germany revealed that fewer German Businesses are expected to increase investments in 201, as Angela Merkel’s hopes that more corporate spending will help stimulate the country’s stagnating economy seem to be fading. The survey also indicated that it has been Germany’s weak investment which has been the main reason for the country’s poor growth performance in the past six months.

Elsewhere, China and Australia sealed a landmark free trade agreement yesterday, which is considered to be more than a decade in the making. The deal will open up Chinese markets to Australian farm exporters and the services sector.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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