LCG Research: Strong Chinese Data & a Stellar Start to US Earnings Season

 

An optimistic start to the week saw Asian markets advance, whilst the dollar eased back. An impressive start to earnings season on Friday, combined with better than expected data out of China overnight helped ease concerns over the health of the global economy, lifting sentiment.

Trade disputes and tightening financial conditions have meant that concerns over the health of the global economy have been plaguing investors. Only last week the IMF downgraded the global growth outlook for the third time in just six months. China has been central to the slowdown fears, as traders fret over the impact of the US – China trade dispute and deleveraging in the world’s second largest economy.

For this reason, data showing that Chinese exports rebounded in March and new bank loans increased more than expected was well received by investors. The bullish data from China boosted risk sentiment, lifting demand for riskier assets such as stocks and high-beta currencies. The Aussie dollar, which is considered a proxy for China plays traded around a 7 week high.

The encouraging Chinese data comes following a stellar start to US earning season. On Friday, JP Morgan smashed earning expectations, posting record profits. Wells Fargo also reported results ahead of forecasts.

Can the improved sentiment last?

After a tough couple of months, economic data and corporate updates are finally providing some ray of light. However, its questionable whether this can last. Traders will be keeping a close eye on where US earning season goes from here. A good run from the banks is half expected given the US rate rises that we have seen last year. Whether the strong start is able to continue beyond the banking sector will be key; right now this is looking unlikely.

China’s GDP data due on Wednesday will also be closely scrutinized and could act as a drag on risk appetite China’s GDP is expected to tick lower to 6.3% year on year in Q1, down from 6.4%. Given how sensitive investors are to any weakness in China, risk appetite could be under pressure again from mid-week.

Wages & CPI to boost the pound?

The pound was edging higher versus the dollar in early trade. Whilst the UK is in no immediate danger of a no deal Brexit, UK businesses will now endure a further 6 months of uncertainty, potentially keeping the UK economy in its standstill state. This could see pressure increase on the pound again looking out across the summer.

For now investors will look towards UK wage data and inflation figures on Tuesday and Wednesday this week. Wages and inflation are expected to tick higher, showing rising inflationary pressures. The BoE have had their hands tied with Brexit. However, the extension to Article 50 and stronger inflationary pressures could see the central bank tempted to increase rates.

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