Daily analysis 15.04.2016

, Autor:

Marcin Lipka

Slightly better Chinese publications should be positive for the global sentiment and stabilize the yuan. Sunday’s Doha meeting is expected to be important for the oil in the short run. The zloty remains weak but stable in the morning.

  • 15.15: Industrial production form the US (survey: minus 0.1% m/m).
  • 16.00: Consumer confidence index according to University of Michigan (survey: 92 points)

Weaker yen

The data from China has brought a lot of attention for recent quarters. Beijing has become an economic barometer for the world and major threat for some countries. Today’s publications of major macroeconomic indicators is slightly better than expected but probably will not convince the pessimists on possible medium term stabilization.

Chinese GDP rose in Q1 by 6.7% y/y. The reading was in line with economists’ expectations and was in the range of the most recent projections announced by Prime Minister Li Keqiang for this year. Slightly above median economists survey published by Bloomberg was retail sales reading (10.5% y/y vs 10.4% y/y) while industrial production rose by 6.8% y/y, the fastest pace since mid-last 2015.

Many economists who analyze Chinese data doubt about their reliability. As a result beside the official readings they tend to follow other factors – steel production, cement or electricity. But its time the data was also fairly good especially comparing to previous reports although 24% increase of cement production was mainly caused by base effect in last year data and different date of Chinese lunar year.

When analyzing other data we may conclude that Beijing tools to boost demand have worked. Infrastructure expenditures rose 20% y/y. The interest rates cuts spurred investments in real estate by 6.2% y/y in the first quarter. It is also worth noting double digit increase in production and sales of cars.

What markets may regard as mixed message is that heavy infrastructure and the real estate investments carry lots of risk, and is not bringing Chinese economy to more balanced and focused on services and internal demand model. It is possible that similar conclusion lead the IMF to boost outlook for China for 2016 and 2017 while lower estimates for the beginning of the next decade.

Overall Chinese data should stabilize the yuan. The selling pressure on the RMB is expected to ease what was actually confirmed by the most recent publications on currency reserves. The readings should be also fairly positive for the Asian economies and decrease its volatility. The Beijing’s actions may pose higher risks for the future concerning servicing debt of some SOE or oversupply in the real estate market.

What are the odds for Doha agreement

The oil market participants have been speculating about the Doha freezing agreement for weeks. Saudi Arabia and Russia are two major oil producers which are expected to cap the production on January levels. Other smaller OPEC nations are also expected to take a part in the deal.

In the morning it turned out that Iranian oil minister is not going to Qatar. However, Theran for weeks have claimed that it has to regain production capacity after the sanctions were lifted. Even though it was widely known the oil dropped around 1% after the message hit the wire.

What are the odds for agreement? According to a Bloomberg survey’s responses from analysts and economists spit evenly. Twenty predict that the freeze will be agreed on Sunday while the rest claim the consensus fail to meet expectations.

Taking into the account the recent involvement from the OPEC members and other oil producers, the odds are bias toward the production cap. However, it is worth noting that since the first news about the freeze the oil has rebounded significantly. So the reaction may be meaningful but short lived and the market may return to speculation about the speed of reduction the oil glut around the world. We may expect that the deal should not push the oil more than 4 USD per barrel.

On the other hand, if the Qatar talks fail to meet the expectations, the oil may slide significantly, but we should also note that the overall level of production is close to the limits of major oil producers so no country besides Saudi Arabia has a spare capacity. As a result, if talks turn to be inconclusive the OPEC export will not rise markedly. As a result the oil slide below 35 USD/barrel is not the base case scenario especially that in the lower prices environment the US production my shrink faster than expected.

The zloty is weak but stable

The situation on the zloty hasn’t changed much to both the euro and the dollar. The Polish currency remains weak but due to neutral global sentiment the sell-off paused. The PLN is also weak to the HUF. It dropped since the beginning of the month around 2%.

If the global sentiment remains stable the zloty should not generate the weakness internally. However, if the risk aversion returns the PLN may weaken markedly to the major currencies with the amount of around 1-1.5 percent. On the other hand if the risk appetite returns to global markets the PLN may gain some value but the appreciation move may be slower than in case of forint so it should confirm the relative weakness of the PLN.

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