This week’s GDP figures out of China became one of the main stories of the week as the latest data showed that the country’s economic growth showed slowing momentum for the sixth quarter in a row and is now seen at its lowest levels since the 2008 financial crisis. Market reaction to this news, however, was very interesting as the downside was relatively limited and prices in equity markets managed to make a significant bounce out of their lows during the session.
The reason for this reversal came from market speculation that these latest GDP numbers will force the People’s Bank of China (PBoC) to implement stimulus measures in order to prevent further economic weakness in the second half of this year. Specifically, the numbers showed that Gross Domestic Product in China grew at a rate of 7.6 percent on a yearly basis, according to the country’s National Bureau of Statistics.
This rate of growth shows a marked decline from the 8.1 percent increase that was seen in the previous quarter and was still below the relatively dismal market forecasts of 7.7 percent. Other data was released at the same time, with Industrial Production and Retail Sales also showing declining momentum for the month of June.
Evidence of a Wider Economic Slowdown
Even with the small market rallies after the markets began to speculate that stimulus measures would be implemented, investors will still be forced to assess the impact of slowing growth and the effects this will have on asset prices as a whole. After the data was released, Singapore put out its own GDP figures for the quarter and these showed an unexpected contraction in growth and this is starting to present convincing evidence that the debt crisis in Europe and the faltering jobs market in the US is taking its toll on Asian manufacturing performance.
It should be remembered that China has already begun to act on its proposed stimulus measures, with a reduction in interest-rates seen at its last meeting. It is looking as though this was a pre-emptive measure to brace markets for the weaker GDP data that was soon to be released. Moving forward, markets will likely need to see additional follow-through on these policy measures in order to keep Asian stock prices supported into the second half of 2012.
Economic performance in China is heavily correlated with the AUD/USD currency pair, and any weakness is likely to force a test of parity with the value of the Aussie falling back to equal levels with the US Dollar. The AUD/USD is starting to show vulnerability, with the pair posting a lower high at 1.2770. This was followed by a break back below the 100 and 200 day moving averages, so the next target is the key psychological 1.00 level, where a minor bounce is expected. Shorter term, however, a break back above 1.0180 will negate this bias and take pressure off of the downside.