FX Primus Ltd.

FX Primus Ltd.

October 15, 2013 21:29 ET

FXPRIMUS Market Brief of the Week: Kicking the Can Down the Road

SINGAPORE, SINGAPORE--(Marketwired - Oct. 15, 2013) - In FXPRIMUS' Market Brief of The Week for 14 October, the brokerage firm's Senior Economist, Jimmy Zhu, looks at the possibility of an U.S. equities sell-off and bond yield tumble, quantitative easing tapering delays and China's economic growth.

Economic Insights

Delay on tapering - Dollar weakens; Threats of default - Dollar strengthens

It will be a big week for the global financial market. Technically speaking, there is a possible default since the White House rejected the Republicans' proposal so far. The U.S. Dollar appreciated against most of the G10 currencies last week, after hopes on the proposal of raising the debt ceiling for another six weeks, although the White House rejected it over the weekend. John Boehner told the public that talks stalled as the White House rejected both the six-week debt ceiling hike and the 2014 budgets discussion.

The continuous shutdown of the Federal government will delay some key data publication schedules once again, turning the financial market into a wild scenario. Through my observation these past weeks, the coming crisis (if realized) will produce an equities sell-off and bond yield tumble. What will happen to the Greenback? The Federal Reserve (Fed) will definitely delay its tapering schedule as expected, so will the Dollar weaken? However, if we look at the Lehman period in 2008, the Dollar opted to surge. Things just arrived too quickly before the market was ready for the new wave; what a wonderful thrilling show! Congress and the White House became the stars and Fed is now just a costar.

Republicans try to "kick the can down the road now," which was the strategy widely used by the Euro Zone in the past three years. Things will bite back if forward thinking conditions continue being ignored.

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China's 3Q Gross Domestic Product (GDP) could expand 7.8% YoY

China's economic growth may expand 7.8% in 3Q, reverting the growth slowdown since 1Q. If there are no surprises, officials can easily achieve the entire year target above 7.5% without a hard landing.

Things in China are a bit similar to the Euro Zone. Just a few months ago, the inter-bank liquidity crisis put the country's growth at the risk, which was reflected in the repo rate. However, all these worries are eased today. Officials will release the 3Q GDP this Friday and I expect the figure to rise to 7.8% YoY, given that manufacturing, investment and exports recovered tremendously in 3Q.

Despite the exports release unexpectedly dropping 0.3% last weekend, one or two monthly figures can't tell many things. Most importantly, the weakening USD last month trimmed exports, due to the delay of Quantitative Easing (QE) tapering together with the RMB strengthening. When inflation rose above 3%, it sent a message that policy should tighten a bit after the 18th Chinese Communist Party Congress (CCPC).

The expectation on long-term policy remains tight, which is reflected in the divergence between the 7-day repo rate and government 10-year yield.

By looking at manufacturing data, I noticed that most small and medium enterprise (SME) conditions worsened. Medium enterprise conditions remained unchanged. Thus, all contributions were from large enterprises and those who stated they own enterprises. It means that there is much reform work needed in 2014, and short-term growth will be sacrificed.

The current growth strategy will not be sustainable, or self-sustainable at least. If the People's Bank of China (PBOC) refuses to assist in June, we could see some default.

From the equities market, a low Price-Earnings Ratio (P/E Ratio) for a sustainable period implied lower corporate earnings capacity. This is also contributed by the factor of "nationalism" in China.

All in all, the recovery in 3Q is inevitable but uneven. The imbalance is from the sizes of companies, nature of companies, sectors and resources. However, we will not have a clear picture until the 18th CCPC.

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