Market commentary: Global equities suffer after weak Chinese data

There may be profit taking possible ahead of tomorrow’s crucial ECB meeting, but also weak data from China caused a further pullback in global equities on Wednesday. The S&P 500 snapped a five-day winning streak, as oil fell after worrisome trade data from China reignited fears of a global growth slowdown. Official data showed Chinese exports fell drastically and Japan’s economy contracted, rekindling demand for Japanese government bonds, US Treasuries and the yen.

In particular, the yield on Japanese 30-year bonds touched a record low of 0.475%. Think about that for a second – you lend someone €100 and in 30 years’ time you get just enough returns to buy yourself a ricotta cheesecake…

In better news, Amazon continues its drive to move into physical stores as it opens its second bookstore in Southern California. Amazon is jumping in at a time when many independent bookstores are on the receiving end of a boom in buying cheap books online and the rise of e-books. But some booksellers are worried that Amazon, by far the dominating force in the online book market, can disrupt physical retailers. Analysts also believe Amazon is testing the idea of using their physical stores as hubs for physical deliveries.

Amazon’s new store will presumably resemble its Seattle store – selling a limited selection of the online giant’s best-reviewed books. The Seattle store also doubles as a showroom for its expanding hardware line-up, which includes its tablets and e-readers.

Boeing tweeted out a thank you to United Airlines after the regional US carrier announced an order to purchase 25 new Boeing 737-700s, in addition to the 40 planes of the same type announced in January. United also announced the end of almost half a century of service of its Boeing 747 fleet. The Chicago-based carrier will phase out the last of its 22 Boeing 747-400s by the end of 2018, two years before its planned retirement.

Goldman Sachs says commodity rally is over

If you were comforted by the recent rally in commodities, you might want to scroll down quickly and skip this paragraph. Goldman Sachs just threw in their weight behind a prediction that the rally in commodities, from iron ore to gold, copper and aluminium, will falter and that prices will slide as much as 20% in some cases.

Commodities tend to be more driven by the ‘basic’ forces of supply and demand than other assets. With demand not forecast to increase and steady supply, prices have fallen. Goldman Sachs argues that the recent rally, fuelled mostly by a more optimistic growth outlook, will attract more supply making it hard for a sustained run up in prices. The analyst also stood by its forecast that crude oil will range between $20 and $40 for the foreseeable future.

The call came just as expectations of US oil inventory build-up are reaching eight-decade highs, even as rigs close and production falls, rattling the markets and many energy companies saw their shares tumbling.

Oil has rallied almost 40% after a low hit in early February. Saudi Arabia, Russia, Qatar and Venezuela agreed last month they would freeze output, if other producers followed suit, to tackle a global oversupply in the oil market. But fundamentals haven’t changed much in the meantime, and a conclusive deal on a production freeze is not within sight.

Do or die for the ECB

The European Central Bank holds its second meeting of the year against a backdrop of inflation well below target and growth concerns. After being disappointed in December, when the policymaker delivered less monetary easing than it had suggested, investors doubt the ECB will be more aggressive.

Expectations are somewhat tempered, but financial markets expect the ECB to cut its deposit rate by at least 10 basis points to negative 0.4%, and expand its asset-buying programme this week. They still do not expect it to hit its inflation target of “close, but below 2%”, in the near future.

Analysts are however voicing concerns about the eligible universe of securities for the ECB’s asset-buying program. If the ECB does indeed ramp up Quantitative Easing, it may have to consider relaxing some of its restrictions on bond purchases. Currently bonds trading below the deposit rate are not eligible for purchase, meaning that more than €800 billion in mostly short to medium term European government bonds, are simply not an option.

Considering that 10 basis points are all but fully priced in, such a cut would ‘free up’ more than half of those bonds for purchase. But with a bleak inflation outlook and yields falling further, the risk is that the effect may be short-lived. Anything more aggressive in terms of negative rates risks considerably worsening the outlook for European banks, another crucial piece of the puzzle. ECB-watchers have suggested that the ECB may introduce tiered rates just as the Bank of Japan has done recently to abate concerns on bank profitability.

This article was issued by Andrew Martinelli, Trader 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.