The Chinese Data And Spanish Bailout News Will Cause 'Risk On' Mode In The Markets

Includes: CEO, PTR, SLX
by: Bidness Etc

The financial markets are operating in a 'risk on, risk off' mode. Fears of a Chinese slowdown as well as worries over the European debt crisis have been triggers for investors' risk aversion. We think that the positive news over the weekend will soothe investors' fears and help the markets to trade higher.

Chinese Economic Data News

China's May investment figures came out over the weekend amid fears of a grim economy and the prior week's surprise interest rate cut. Though Saturday's data was of a mixed nature, it was able to beat the picture of a weakening Chinese economy.

In terms of value, both imports and exports hit new records. Trade surplus of $18.7 billion exceeded the forecasts of $16.2 billion. The data shows that exports for the month of May grew by 15.3%, more than double the forecasts of 6.9% (Fox Business, 2012). Export growth was largely driven by 11.3% growth in EM Asia and 7.3% growth in U.S. exports. Low-end consumer goods and mechanical products were the main contributors to overall export growth. Similarly, growth of 12.7% in imports also beat the analysts forecast of 5.5% (Also Sprach Analyst, 2012). A 24.4% gain in imports from the EU was the main contributor, followed by a 15.8% growth in imports from the U.S. (JPMorgan, 2012).

Analysts at Citigroup Global Markets are of the view that this growth in imports and exports can partially be attributed to working-day effect, since May has one additional working day. With a contracting EU economy and a modestly paced U.S. economy, analyst view challenges ahead. Copper topped the imported commodities list with a gain of 16.0% m/m followed by growth of 12.6% in refined oil (JPMorgan, 2012).

Fixed-asset investment and industrial output did not meet analyst expectations and plunged to its lowest levels. The slowdown was largely experienced in steel production, which plunged to 6.2% from 7.9% year over year. Investors can short sell Market Vectors Steel ETF (NYSEARCA:SLX). Cement production and power generation saw an upturn and grew from 4.0% and 0.7%, respectively, in April to 4.3% and 2.7% in May.

Inflation of 3% year over year eased more than expected and declined from April's inflation figure of 3.4%. Going forward, June's cut in domestic fuel prices will help contain inflation in non-food items. The cut in fuel prices will impact shares of PetroChina (NYSE:PTR) and CNOOC (NYSE:CEO). Selling short these Chinese ADRs can be profitable as both companies operate in the Chinese oil market. Food prices are also expected to fall significantly by next month. This will bring inflation for the month of June closer to 2.5%.

Local Chinese organization took the advantage of decreasing commodity prices, which led to a growth in the import of raw materials. Import volumes for iron ore, crude oil, and copper grew by 19.8%, 18.2% and 64.8%, respectively. Since soybean prices have been on the rise since the beginning of the year, its import experienced a decline.

The Chinese government took stimulus measures, such as infrastructure spending on railways and energy. Analysts view it as too late to impact May's data, but it will impact fixed-asset investment in coming months. Falling inflation coupled with weak growth leaves room for the central bank to ease further. Analysts at Citigroup Global Markets see another interest rate cut in sight to help support a second-half rebound.

The impact on this news was largely reflected in the performance of Asian currencies and crude oil prices. Samsung Electronics, heavily tied to China, has seen a 1.7% gain (Bloomberg, 2012).

Still, many believe that a key risk for China's recovery is the weakening global economy, including the euro debt crisis. It could have significant repercussions on the second-half economic recovery.

Spanish Bailout News

One of the dominant themes coming out of Europe recently was the concern relating to Spain's banking system health owing to reckless lending to property developers. Weekend news regarding the subject is that Spain secured a bailout package of €100 billion to bolster its debt-stricken banking system. This bailout makes Spain the fourth European country to seek assistance. It was not decided yet whether the funds would come from the EU's temporary rescue fund, the EFSF, or the permanent mechanism, the ESM. A clear preference, to channel funds to Spain from ESM, was noted, however (Telegraph, 2012).

Many, including Washington, hail it as a milestone. However, a few call it a short-lived respite. Fitch slashed Spain's credit rating by three notches to BBB, which is very close to a junk bond. Moody's has indicated a likely cut in Spain's rating.

The bailout provided an immediate boost to market sentiment. Equities rallied in Asia today after the agreement in Europe. Japan's Nikkei climbed 1.86% and Korea's Kospi was 1.4% higher at 10:30 am PST. MSCI Asia APEX 50 saw the biggest hike of 2.18%. The euro leaped from $ 1.2561 on Friday to 1.2644 early Monday, a jump of 0.66%.

In the commodities market, gold rebounded by nearly 1%. Silver, platinum and palladium outpaced gold, with palladium leading the pack with an increase of 2.4%. Copper futures added 2.3% (Reuters, 2012).

The news enhanced the risk appetite of investors, which is why traditional safe heavens have seen a decline. The 10-year treasury yield saw a 5-basis-point push to its highest levels this month (Bloomberg, 2012).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.