Thursday, March 27, 2014

Asia EM Express: China's stocks drop on concerns with declining industrial profit growth

FXStreet (Łódź) - Chinese stocks fell on Thursday, with the Shanghai Composite Index dropping 0.8% to 2,046.59 at the close. The Index has seen a 3.3% decline so far this year, on mounting worries about China's economic slowdown, evident also in the latest industrial profit growth data.

Nevertheless, despite the recent market concerns over China's weakening growth and financial tensions, Greg Gibbs, FX Trading Strategist at RBS points to some positive developments, suggesting that the country's situation is not as bad as it is feared:

“It is notable that through the early phase of CNY weakness since Feb, Chinese onshore rates fell further. And in the later stage, CNY FX forward points fell and remain around cyclical lows. Both suggest that despite the alarming news, financial stress in China is not greater; in fact much of the Chinese economy has found easier funding conditions.”

“While we should not discount the negative fundamental developments in China including weaker data, slowing property sector and weaker commodity prices, a key difference in this period and the heightened fears over China's financial system and economy in Q2 of last year, is that interest rates onshore and implied interest rates in the offshore FX market are down (they both rose sharply in Q2 2013).”

Economic data

On an annual basis China's industrial profit grew 9.4% in February, down from 13.2% seen in December. By sector, the coal mining industry posted the largest drop in profit growth of 42.5%, followed by steelmakers who saw profit growth contraction of 26.1%.

According to Tim Condon, Head of Research-Asia at ING: “The data comes amid press reports of distress among small steel producers, including the failure of one to repay its bank loans this month. Implementation of the Plenum reforms will, we think, mean significant consolidation among the thousands of steelmakers in China. Mongolia’s coal producers will be collateral damage.”

Thai trade data showed an increase in exports by 2.4% year-on-year in February, but imports dropped considerably by 16.6%, which could mean that domestic demand had been damaged by the ongoing political crisis in the country. The US$2.52 billion trade deficit seen in January shifted to a US$1.8 billion trade surplus.

South Korea's March Consumer Confidence Index remained unchanged from February at 108, the Bank of Korea reported on Wednesday. Market consensus pointed to an increase to 110.

Technicals

The Chinese yuan fell on Thursday against the dollar by 0.9% to 6.2145.

The daily USD/CNY FXStreet Trend Index was slightly bullish, and the OB/OS Index neutral. RSI was neutral at 70.5125 at the last close. Daily 2-StDev Volatility Bandwidth was expanding at 344 pips, with ATR (14) expanding at 183 pips. The 1D 200 SMA was at 6.1062, while the 1D 20 EMA at 6.1668.

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