Financial market research and analysis

Chinese GDP grew at a slightly disappointing pace of 1.6%q/q in Q4, pulling the year-on-year growth lower to 6.8%y/y. Following the aggressive sell-off during the second half of last year, the lower official growth figures have not unduly upset market action as the prospect of near term stimulus from Chinese authorities keeps the bears in check for now. China’s fixed asset investment expanded 10% (vs 10.2% exp.), the slowest pace since 2000.

Shanghai’s Composite gained 3.22% on PBoC intervention; Dow Jones reported ‘China's central bank continues to pump cash into the financial system, offering a total of 155 billion yuan ($23.52 billion) to commercial lenders Tuesday via a routine money market exercise.’
On a side note, we continue to point out the decoupling between the Chinese stock market and the real economy. The highly leveraged Chinese stock markets do not fully represent the reality on field. Of course the sell-off is due to a certain level of stagnation in the market in the aftermath of extreme zeal. The fall in copper prices have both economic and financial implications in real terms as lower copper, mostly used as collateral for loans, limits the financial capacity of firms and may encourage certain businesses to halt expansion.

Commodities were better bid in Asia; Brent gained 3.22% as WTI advanced 1.15%.
Risk appetite is clearly better this morning yet the market volatility remains high suggesting that gains in stocks may remain fragile.

The FTSE is higher thanks to sharp rebound in miners. Top gainers in London are Anglo American (+8.98%), Glencore (8.38%), Antofagasta (+4.23%), BHP (+4.14%) and Rio Tinto (+4.13%).

The inflation in the UK printed a better-than-expected performance (+0.1%m/m vs 0.0% exp.) during the festive month of December. As knee-jerk reaction, the pound recovered to 1.4340 against the US dollar and stepped below the 0.76 mark against the euro.

The mid-term sentiment in pound remains downbeat however as the probability of a June hike from the Bank of England is down from 45% to 35% since the end of 2015. If the Fed sticks to its plan including three-to-four hikes throughout this year, the divergent Fed/BoE policy outlook could further weigh on Cable. The pair is attempting to determine a bottom at 1.4250, which has acted as support in 2010. A break below this level should gather momentum for an extension to 1.4040/1.4000 psychological support.

The UK has certainly been hit by the rout in energy and commodity prices given the UK benchmark’s weighting to the relevant commodity producers. Despite witnessing a degree of consolidation in the index, we may not yet have seen the bottom. Nevertheless, the US is also subject to same macroeconomic factors, and a further collapse in global economic outlook will almost certainly give the Fed pause and may imbue some reluctance in proceeding with its scheduled tightening. If the market starts seeing the December Fed hike as ‘one-and-done’ move, then Cable could well bounce back to 1.45-1.50 in the first quarter.

EURGBP surpassed 0.75 hurdle as euro kept on gaining after the ECB disappointed by a softer policy loosening in December. Brexit risk could well keep the GBP gains limited however as we have come to notice recently.

Across the Channel, the ECB is expected to maintain the status quo at this week’s meeting, the accompanying tone will be important. Until then, we see little incentive or catalyst to move out of 1.08/1.1050 range in EURUSD.