Worsening Chinese Data Spooks Asian Markets

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China data spooks markets

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China has unveiled a rash of horrific data, further hammering markets after the Fed’s emergency rate cut set panic amongst investors worried about the empty monetary tool kit were the coronavirus crisis to worsen.

China’s fixed asset investments in the January February period contracted 24.5%, a fall much steeper than the estimated 2% forecast. The country’s industrial output in the first two months of the year dropped 13.5%, falling more speedily than the -3% forecast, and retail sales plunged 20.5%, worse than the forecast contraction of 4%.

“The latest activity and spending data were much weaker than expected and point to a far deeper downturn than during the Global Financial Crisis. While domestic conditions should improve slowly in the coming months, the mounting global disruption from the coronavirus will hold back the pace of recovery,” said Julian Evans-Pritchard, Senior China Economist at Capital Economics.

Evans-Pritchard had previously assumed that the statistics bureau would be reluctant to fully acknowledge the recent weakness as doing so would make official GDP targets unreachable, but the contraction was worse than anticipated and therefore the prognosis becomes gloomier.

Not everyone was surprised by the data, as fears of what lay ahead is forcing recalibrations of forecasts.

“The actual shock could be much bigger than those deeply negative January-February numbers suggest, because the lockdowns started only from 23 January. Given the relatively slow resumption rate (around 70% at the moment), we expect negative growth for all activity data in March too, though these will likely be less negative,” said Ting Lu, a Nomura economist, who said Monday’s data release was in line with his expectations.

Nomura now forecasts growth in Q1 would likely be negative, worse than the 0.0% forecast made earlier.

The road ahead suggested a slow pace of recovery even if the spread of the virus stabilizes in China as consumer spending would take a hit on the back of the rise in unemployment and exports would be constrained by the global spread of the virus.

“GDP is now almost certain to contract in 1Q. Fixed investment the hardest hit in the first two months of the year given restrictions on construction and shortages of migrant workers. Retail sales also registered the first contraction in history as people were confined to their homes,” said Nathan Chow, strategist at DBS Bank.

Although there have been improvements in the current month as suggested by data from coal consumption to electricity usage and transport volume, which showed an uptick, the economy was still operating at a far below capacity.

“Beijing will likely roll out more fiscal and monetary stimulus to spur the economy. On top of the RRR cut today, we expect the PBOC to lower the LPR by another 10bps to 3.95% this Friday,” said Chow.

Umesh Desai

Umesh Desai is Asia Times Finance Editor. Prior to his current role he was at Reuters for 19 years before which he was a credit ratings and equity research analyst. A chartered accountant by training, he is based in Hong Kong. More by Umesh Desai

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New Covid-19 cases in India spook Dalal Street

The fear gauge has surged nearly 70 per cent in the past week.

Mumbai: The stock market failed to wriggle out of bear grip and fell for the seventh straight session on Monday after the government announced two fresh cases of Covid-19 in the country. Shares rose 2 per cent in early trade but plunged later to end with losses as investors worried about the economic damage to India.

Benchmark indices ended at a four-month low with the Sensex falling 153.27 points, or 0.4 per cent, to 38,144.02 while the Nifty closed at 11,132.75, down 69 points — or 0.6 per cent — from its previous close. The two indices have ended lower in 11 out of past 12 sessions. The Volatility Index, or VIX, soared 8.5 per cent to 25.2 on Monday, indicating heightened risk perception.

The fear gauge has surged nearly 70 per cent in the past week.

The local market opened strong on Monday, tracking gains in the rest of Asia on hopes of pre-emptive action by global central banks to combat Covid-19’s economic impact.

Central bankers from Japan to the US pledged action to stabilise financial markets that have been rattled by the spread of Covid-19 cases. Such expectations helped most Asian markets quash the pessimism following China’s dismal manufacturing PMI (purchasing managers’ index) data for February. At 35.7, the reading was worse than the previous low hit during the global financial crisis of 2008-09.

On Monday, China’s Shanghai Composite index rose 3.6 per cent, South Korea’s Kospi gained 0.78 per cent and Hong Kong’s Hang Seng advanced 0.6 per cent.

With new cases emerging in India — one in Delhi and another in Telangana — investors said Monday’s fall highlights the fragility of any market bounce-back.

“India was looking like a safer place. So with these new cases, there is uncertainty. Consumer behaviour is the biggest issue here and to that extent, economy will go down,” said Raamdeo Agrawal, chairman of Motilal Oswal Financial Services.

“Markets will continue to be volatile. The excesses in valuations will get corrected now,” he said.

The Nifty and Sensex have both lost around 8 per cent in past seven sessions, wiping out Rs 12.3 lakh crore of investor wealth.

MID, SMALLCAPS BLEED
Mid and smallcap indices have turned negative for the calendar year 2020, and about 60 per cent of the BSE500 constituents are trading below their 200-day moving average.

Foreign investors continued their selling spree, dumping shares worth Rs 1,429 crore on Monday. In the past seven sessions, they have sold Rs 12,400 crore of shares. Domestic institutional investors — which bought shares worth Rs 16,900 crore in February, a sixmonth high — continued to purchase, mopping up stocks worth Rs 7,621 crore on Monday.

Last week saw the worst weekly performance for markets in over a decade as Covid-19 cases were reported from Italy, Iran, South Korea and even the US. Amid this panic, there was optimism as India had only three confirmed cases.

“Only if there are signs that the worst is behind us will the global markets go higher,” said Andrew Holland, CEO, Avendus Capital.

UBS believes the outbreak could affect India’s growth in the March quarter.

“While the situation is still evolving and the scale of economic impact is highly uncertain at this point, we think an adverse impact of around 20 basis points could be felt in India’s real GDP growth for the March quarter,” said UBS.

Asia Markets

Chao Deng

Circuit breaker kicks in after Shanghai’s 6.9% plunge

Women ring in the new year at the Tokyo Stock Exchange on Monday.

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Asian markets tumbled Monday on the first day of trading in 2020, with declines so steep in mainland China that authorities halted trading there for the rest of the day.

Analysts cited a number of reasons for the selling, including China’s disappointing manufacturing data, reported earlier Monday, and the coming removal of a ban on major shareholders from selling stakes, put in place during the summer stock crash.

The Shanghai Composite Index SHCOMP, -0.59% fell 6.9%, its biggest decline on record for the first trading day of the year, before trading was halted. The smaller Shenzhen Composite 399106, -0.47% fell 8.2%.

The slide in Chinese stocks and the yuan’s accelerated depreciation drove markets elsewhere in the region deep into the red.

Japan’s Nikkei Stock Average NIK, +0.00% was down 3.1%, Hong Kong’s Hang Seng Index HSI, -0.51% fell 2.7% and South Korea’s Kospi 180721, +0.03% lost 2.2%.

Australia’s S&P/ASX 200 XJO, -1.68% fell 0.5%, with losses offset by gains in oil.

On its launch day, a new circuit-breaker system for Chinese stocks kicked in after steep declines on a benchmark of blue-chip shares. Chinese officials announced plans for the system in December, as a measure to prevent the wild swings that accelerated this summer’s stock-market crash.

But analysts and investors say the circuit breaker could trigger more selling, as the freeze spooks investors and losses snowball, setting off the halt all over again.

Investors may push for redemptions after Monday’s losses, said François Perrin, a portfolio manager at East Capital, a Stokholm-based asset manager which manages €2.1 billion ($2.3 billion). Losses could deepen still further on Tuesday, he added.

“The circuit breaker system actually creates a downward spiral” as more investors get nervous about trying to get out before others, said Hao Hong, managing director at Bank of Communications Co. “Having this so-called system in place is actually making the selling worse.”

The first trading halt on China’s mainland stock exchanges came shortly before 1:15 p.m., when the CSI 300 000300, -0.57% , a benchmark of the largest 300 stocks listed in Shanghai and Shenzhen, fell 5%, triggering a 15-minute halt under the new rules. A further slide to 7% triggered a second halt under the new system, this time for the remainder of the day.

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When authorities announced the new circuit breaker in December, they said it to help the market “cool off in order to prevent the spread of panic sentiment, which may exacerbate volatility.”

Monday marked a fresh round of volatility for Chinese markets, which have rebounded by more than 20% from their lows of the summer, when heavy selling triggered volatility around the globe. Over 1,200 stocks on the Shanghai and Shenzhen market fell by the 10% daily downward limit, according to Wind Information.

A big difference this time around is lower leverage, or the use of borrowed money to buy stocks. In the summer months, local investors borrowed money from Chinese brokerages, which drove shares sharply up through June — and down in the weeks thereafter, as investors sold stakes to repay their brokers. Since then, official margin loans in China’s mainland market have fallen to less than 1.9 trillion yuan ($292.6 billion) from a peak of 2.3 trillion yuan in June. Authorities have also clamped down aggressively on loans from China’s unofficial shadow banks.

Losses started to build across the region after a private reading of factory-floor conditions showed activity contracted for the 10th-straight month in December, the latest signal that China’s economy is stalling.

The Caixin China manufacturing purchasing managers index fell to 48.2 in December from 48.6 the previous month. A figure under 50 indicates contraction.

Worries about selling pressure from large Chinese shareholders are building ahead of Friday, when a six-month selling ban put in place by authorities in the summer expires. The ban, which came into effect on July 8, was part of a series of measures to arrest a downward spiral in shares at the time.

The magnitude of the yuan’s move Monday caught investors off-guard. China’s central bank guided the currency weaker, setting the daily fix for the onshore yuan at 6.5032 on Monday, its weakest level since 2020, compared with 6.4936 on Dec. 31. The currency can trade 2% above or below the fix.

“Psychologically [today] was a big move — going through 6.50,” said Mitul Kotecha, head of rates and foreign-exchange strategy at Barclays in Singapore. “There’s been a lot of surprise in the market that China hasn’t slowed this decline [in the yuan] or come in more aggressively.”

The offshore and onshore yuan traded at their weakest levels since April 2020, with the onshore yuan as weak as 6.5318 to one U.S. dollar in late trade Monday. The offshore yuan was down as much as 0.97% against the U.S. dollar. Traders cited hedge funds aggressively buying U.S. dollars, pushing the yuan weaker.

Meanwhile, the yuan’s trading hours are set to be extended Monday, and investors say there could now be further losses.

Benchmark yields, which move inversely to prices, on five-year and 10-year Chinese government bonds rose after hitting multiyear lows in 2020.

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