Market commentary: The Chinese GDP

With the US market closed on Monday for the Martin L. King Day, the main news came from China after releasing the fourth quarter and full year GDP data. Although the second largest economy reported an economic expansion of 7.4%, very close to the Government target of 7.5%, this has officially become the weakest GDP number since 1990.

GDP’s growth was supported by an increase in industrial output, which rose 7.9%, and better retail sales, which rose 11.9%, however the announced shift from an economy based on “growth at all costs” to a better quality and more sustainable internal demand driven economy is starting to materialized within the GDP data.

Although on an historical basis the latest GDP data seems weak, when contextualized in today economic environment, China did not performed so bad and managed to substantially reach the Government target while slightly beating analysts’ forecasts. Following the news, the Shanghai and Hong Kong markets rally overnight adding 1.82% and 0.76% respectively, followed by an appreciation of the Yuan.

In addition to this positive news, China has also taken a first row sit in the news for suspending all three major national brokerage firms from any additional margin and security lending, after an investigation suggested major and consistent regulatory breaches.

In fact, it appears that Chinese major brokers allowed customer to over-leverage and delay margin call repayments against specific regulations implemented by the competent Authority.  

This unprecedented measure taken by the Chinese Authorities has caused a selloff in the sector, with the largest listed brokerage firm Citc Securities Co., losing 20% in over the last two trading sessions and Haitong Securities Co., also listed in Shanghai, losing 18%.

Crude Oil took another dive losing over 2.7% with the Brent Benchmark returning below $50 per barrel on the back of GDP data from China. Markets fear that with the second largest economy adjusting to lower annual growth and US becoming less dependent from oil imports, the demand for the commodity will not be able to absorb the current oversupply for quite some time.

In this context more volatility for oil related sectors is to be expected, and the recently one of rebound of energy stocks may be very short lived upon US reopening today, with investors still likely to leave money on the side awaiting a more consistent stabilization of oil and commodities prices before returning in the market as buyers.

Europe posted a positive session on Monday and has opened higher this morning fuelled by the better than expected China GDP data and ahead of a major ECB meeting on Thursday, when a formal QE program is widely expected to be announced.

Although the actual implementation of such a program may prove challenging and long term, analysts and most investors are betting that the news will support equities and bonds markets in the short term, making the EUR a potential good short term trade rather than a long investment.

At the time of the writing, the Euro Stoxx 600 was up 0.49%, the Dax Index was gaining 0.26% and the FTSE 100 opened 0.46%, while even the Swiss SMI managed to open 1.03% higher after three consecutive days of heavy losses, and the provision of a very attractive entry point for new investors.

Finally, Delta Airlines Inc. is due to report this afternoon, with the airline sector experiencing a sustained rally supported by lower fuel costs, and the Company bouncing back from last October selloff posting a stunning gain of 48% up to date, its earnings release will be closely watched by investors assessing whether the stock can keep up the momentum and provide additional upside potential.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. 

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