China clouds darken market mood

Broadly speaking, the global backdrop for Asian markets is still bright, with investors confident that the Fed will soon cut US interest rates keeping the dollar, bond yields and volatility in check, and boosting risk assets.

But there’s a cloud that shows no sign of lifting: China. If anything, it’s getting darker.

The economic “data dump” from Beijing on Friday showed that China’s recovery is sputtering – investment growth slowed, retail sales expanded at the slowest pace since late 2022, and new home prices fell at the fastest rate in nine years.

Most alarming, the property sector bust is deepening. Granted, Chinese and Hong Kong shares jumped on Friday after Beijing unveiled a series of historic steps to stabilize the sector, but will the bounce last?

Even though the central bank said it is facilitating 1 trillion yuan in extra funding and easing mortgage rules, and local governments will buy some apartments, deep-rooted fundamentals of huge over-supply and weak demand remain.

Renewed concern over China’s growth raises the question of how Beijing will finance its fiscal support measures in the long term. China is sitting on more than USD 3 trillion of FX reserves. Is now the time for China to dip into that rainy day fund to prevent the property sector bust from bringing down the wider economy?

It’s unlikely, and Beijing may well default to ramping up exports as the preferred path to recovery. But that would not be welcomed by the United States, which last week imposed extra tariffs on USD 18 billion of imports from China.

These tariffs and the hardening battle lines between the West and China on trade are bound to feature prominently in next week’s meeting of G7 finance officials in Italy. US Treasury Secretary Janet Yellen will attend, but it is unclear if Fed Chair Jerome Powell will travel, after he tested positive for COVID-19.

That said, financial markets are enjoying a period of remarkable calm right now. Global FX volatility is the lowest in five weeks, US Treasury market volatility is at a six-week low, and the VIX index on Friday fell below 12 for the first time this year.

This low volatility environment is helping to lift US, European, and other stock markets to all-time highs.

The Asian economic calendar on Monday offers a decent serving of indicators for investors to get their teeth into, including: GDP from Thailand, current account and trade data from Indonesia, Malaysia, and Taiwan, and unemployment from Hong Kong.

China’s central bank is widely expected to keep its one- and five-year loan prime rates on hold again at 3.45% and 3.95%, respectively, after leaving its medium-term lending facility loans unchanged on Wednesday.

Pressure is mounting for a cut soon, though.

Here are key developments that could provide more direction to markets on Monday:

– Thailand GDP (Q1)

– Taiwan exports (April)

– Japan tertiary index (March)

(Reporting by Jamie McGeever; Editing by Lisa Shumaker)