- In South Africa we expect the rand to remain under pressure as the country has never been closer to losing its investment grade rating
- According to a report from the Chinese Industry, steel demand will decrease substantially by 4.8% in 2015. Even worse, in 2016 the demand is expected to decline by 3%
- Most countries are facing debt so massive that their own investments are declining
- The global outlook is negative and the western world’s purchasing power is weakening, as most developed countries are indebted at too high level
It was a relatively quiet session in Asia after the sharp movements on Tuesday as risk-off sentiment spread. The US dollar appreciated against EM and commodity currencies and lost ground against funding currencies such as the Japanese yen, the euro and the Swiss franc. Crude oil dominated the headlines yesterday as both WTI and Brent crude hit lows from 2009. West Texas Intermediate crude reached $36.64 and Brent crude fell to $39.81 a barrel. Obviously, equities across the globe buckled under heavy selling pressure with all indices heading deep into negative territory. European shares were roughly down 1.80% with the Footsie falling 1.42%, the DAX -1.95% and the SPI dropping 1.40%. In the US, the sell-off was less pronounced as the S&P 500 slumped 0.65%, the Nasdaq edged down 0.07%, while the Dow Jones erased 0.92%.
This morning, Asian markets are still catching up and are therefore blinking red on the screen. The Nikkei was down 0.98%, while the broader Topix index dropped 0.84%. In mainland China, the Shanghai Composite edged up 0.07% and the Shenzhen Composite fell 0.32%. Hong Kong’s Hang Seng was down 0.33%, while in Taiwan, shares fell 1.37%. In Europe, futures are pointing to a higher open.
***Yann Quelenn, Market Analyst: “There is one indicator which makes us wary that China’s current crisis may be deeper than anticipated. We find ourselves now questioning the logic that China’s economy is in transition. According to a report from the Chinese Industry, steel demand will decrease substantially by 4.8% in 2015. Even worse, the outlook for 2016 is that demand is expected to decline by 3%. As a result an increasing number of small Chinese companies are closing down.
Overall, the manufacturing sector in China has, according to the steel Chinese association, lost more than $11 billion this year. This goes way against the widespread belief that the steel demand would increase exponentially within the next decade as long as emerging countries’ economies were developing. Instead, most EM countries are now facing debt so massive that their own investments are declining.
We now believe that the Chinese economy is now moving toward another type of economy oriented by a domestic sector of services. China is striving to find new growth drivers despite the fact that it would take exponential resources to maintain 10% growth indefinitely. And it is not because the manufacturing sector is declining that China is diversifying its economy, it is because of the lack of growth. The global outlook is negative and western world’s purchasing power is weakening. Most developed countries are indebted at too high a level. And between investment and austerity, Western countries’ officials have made their choice.”***
Released on Tuesday, the UK’s industrial and manufacturing productions painted a mixed picture with the former beating median forecast (1.7%y/y vs 1.2% expected) and the latter falling short of expectations, printing at -0.1%y/y versus 0.0% consensus. The cable continued to slide further - the pound lost as much as 0.70% against the greenback yesterday - and hit 1.4957 before recovering above the $1.50 mark.
In South Africa, bad news from the economy keeps piling up as the rand fell to all-time low yesterday. Current account deficit widened to 165bn in the third quarter, while economists were expecting a deficit of 152bn as domestic demand for foreign goods increased substantially. Separately, manufacturing production contracted 1.7%y/y (s.a.) versus -0.5% median forecast. On the bright side, the previous reading was revised higher from 2.2%m/m to 2.4%. USD/ZAR 14.7009 on Tuesday before stabilising around 14.50. We expect the rand to remain under pressure as the country has never been closer to losing its investment grade rating. Fitch downgraded South Africa’s debt to BBB-, while S&P switched the outlook from stable to negative.
Today traders will be watching the inflation report and retail sales from South Africa; inflation report from Brazil; wholesale inventories and MBA mortgage applications from the US; RBNZ rate decision (OCR expected to be cut from 2.75% to 2.5%).