Global Stocks Losing Steam
More than a year after the Shanghai Stock Exchange Composite Index came crashing down, new Chinese trade data revealed stunning weakness in the Middle Kingdom’s trade situation. As the information was absorbed into markets Wednesday night, stocks dropped to three-month lows.
The news was less than thrilling on both sides of the balance sheet. (Source: “Global Stocks Tumble To Three Month Lows As China Fears Return,” Zero Hedge, October 13, 2016.)
On the export half, there was an unambiguous decline in shipped goods, regardless of whether they were denominated in dollars or yuan. In fact, September was the largest one-month drop since the first quarter.
Goods that left the country and were transacted in yuan fell by 5.6% from the same month last year, while exports transacted in U.S. dollars fell by a whopping 10%. Such a sharp decline in demand for goods from the “World’s Factory” suggests that global economic growth is weakening.
Imports aren’t anything to write home about either. To be sure, there was a small 2.2% uptick in yuan-denominated imports from the same period last year, but that could easily be attributed to a surge in credit. Chinese authorities have been trying to stimulate spending through credit.
However, the U.S. dollar imports fell by 1.9%, showing that China’s transition to a consumption-based economy is proving more difficult than previously imagined. Analysts also think the dismal trade data will reignite concerns about the health of the Chinese economy.
For instance, Deutsche Bank AG notes that, “while the trade data has a tendency to be quite volatile, the data will pose downside risks to the Q3 GDP print next week and will also likely put the focus back on the currency.” (Source: Ibid.)
Unsurprisingly, the MSCI All-Country World Index edged down towards a three-month low after the data were released. It is particularly bad timing because the Federal Reserve is most likely going to raise interest rates by December, meaning investors are fighting on two fronts.
The 75% probability of a rate hike implies a rising interest rate environment, which brings a whole set of problems related to credit and bonds. Meanwhile the weaker trade data would be a drag on economic growth, making this an uncomfortable scenario for investors.