Moody’s Investor Service today reduced growth projections for the Group of 20, downgrading its GDP target from an annualized 3.1 percent to 2.8 for 2015. Driving the reduction was a downgrade of full-year estimates for China, as analysts at the firm calculate the impact on other Asian and commodity-centric economies. China remains central to bearish market narratives with the revelation today from Bank of China that although profits increased by 1 percent for the quarter ended in June, its ratio of nonperforming loans has gone up 24 percent since January. The biggest loser in this scenario of lessening expectations remains global equity markets. According to Jefferies, quantitative research department equity funds experienced their heaviest investor outflows since November 2014 in the week ending August 26.
Another late-day rally for Chinese equities. For the second day on a row, the Shanghai composite index rose sharply during the final hour of trading to close up by 4.8 percent. Once again, analysts suspect that heavy buying by government-affiliated entities drove the sudden rally. China Securities Finance Corp., the primary special purpose investment vehicle being deployed to prop up shares, is believed by many to have spent billions in yuan during trading this week. Analysts note that despite the sudden decline in share prices stocks on the Chinese mainland trade at a significant premium to earnings with the components of the Shanghai exchange’s benchmark price at a multiple of reported earnings nearly twice that of the S&P 500.
Numbers out of Europe show mixed sentiment. Euro zone data released by the European Commission beat consensus forecasts, with the headline economic sentiment advancing for August to 104.2 versus a prior 104. Notably both the business climate and industrial confidence subindexes registered lower than expected, indicating that the corporate sector in the region remains concerned over globally slowing demand signals.
Apple to unveil new products. Yesterday tech giant Apple invited investors to an event to be held September 9 in San Francisco, during which it is anticipated the company will reveal a host of new products. Among the new lines expected by analysts are the iPhone 6S and iPhone 6S plus, as well as an Apple TV set-top box.
U.K. economy continues winning streak. Second-release second-quarter GDP data released today by the Office for National Statistics confirmed that the U.K.’s economy grew for the tenth consecutive quarter at a pace of 0.7 percent versus the first three months of the year. The data, which was in line with consensus forecasts, included improvements in export and household consumption figures.
Portfolio Perspective: A Hard Landing for China?
“Essentially, fiscal policy is a monetary problem. Monetary problem cannot be resolved without currency adjustment. This is the impossible trinity China is trying to break. We can’t see how China can break this trinity without inflicting pain on itself or the rest of the world. The debate for China is no longer between realizing a soft landing or a hard one. It is now between a hard landing and a financial crisis, in our view.”
Kevin Lai is chief economist, Asia ex-Japan, at Daiwa Capital Markets in Hong Kong.
