Markets around the world fell sharply overnight after another bout of weak economic news from China, which have again hinted that the economy could be slowing more sharply than it seems.
As well, a small private steel making company is reported to have defaulted on its debts, the second such event in a week. Its problems are now seen as responsible for the sharp fall in iron ore prices earlier in the week.
Also undermining sentiment were reports of Russian troops exercising near the Ukraine border. As well western countries increased their warnings to Russia about possible sanctions after this weekend’s vote in Crimea.
For these reasons markets are likely to go into the weekend looking to the downside until the situation in Crimea and Ukraine is clearer – and that won’t be until next week.
Wall Street fell, the Dow lost 1.4% and the S&P 500 1.2%, pushing it back into the red for 2014. Nasdaq lost 1.5%.
It’s still up for the year, but the Dow is down 2.8% and the S&P 500 is off 0.1%. Tellingly the US 10 year bond rate hit 2.65% as worried investors piled into US Treasuries. It was closer to 2.8% a week ago.
But US economic data in retail sales and jobless claims, were solid – showing the economy is emerging from the effects of the severe winter. But investors ignored that news and fretted about China, and Ukraine.
It will make for a bad start to the market here today with the overnight futures trading suggesting a fall of just over 1%, or 58 points for the ASX200.
Gold edged up $US3 to $1,373 an ounce and oil was 24 cents higher in New York at just over $US98.20 a barrel.
And the other commodity in the limelight, copper, had another weak day with the Comex price down 1.3% to just over $US2.92 a pound and looking to go lower.
Markets in Europe all lost 1% or more, while Asian markets were mixed – most lost ground, but Shanghai rose 1%, despite the economic data surprising by being weaker than forecast and the ripples from the problems at Haixin Steel.
It’s problems and that at a small solar company last week, were brought into focus by comments made by Chinese Premier Li Keqiang, who told an annual media conference yesterday that the country was likely to see a series of defaults as the government accelerates financial deregulation.
He tried to soften the impact of that warning by adding that the government would take steps to ensure they do not pose a threat to the wider financial system.
The fear is that these sorts of small financial failures will snowball into a much more complicated problem and will in turn threaten banks and bigger companies.
The latest economic data in China, covering January and February’s industrial production, retail sales and urban investment, all fell noticeably – well under forecasts.
The dollar traded around 90.20 this morning in early Asian trading, down from earlier in the day and looking like it will revisit the sub-90 cent level during the day (muted cheers from the Reserve Bank).
The weak data released yesterday, came after the surprise 18% fall in exports in February (but imports were still up a solid 10% or so in both February and January).
As well, the news came after copper and iron ore prices – two key raw material imports – fell to four year lows this week, and a small Chinese solar group was allowed to default on its debts.
Industrial output slowed to 8.6% annual growth over the two months (combined because of the impact of the Lunary New Year holiday), down from 9.7% in December, 9.9% a year ago and missing forecasts of 9.5%.
It was the lowest reading for industrial output, which closely tracks overall economic growth, since August 2009 when the economy was struggling to emerge from the impact of the GFC.
Fixed-asset investment fell to 17.9% year-on-year, down from 19.6% in December and far short of forecasts for growth of 19.4%. It was up 21.2% for the first two months of 2013.
And retail sales fell to 11.8% from 13.1% in December, again well below forecasts of 13.5%, and again short of 2013’s 12.3% growth rate.
So it was no wonder that a closely-watched annual news conference by Chinese Premier Li Keqiang attracted a lot of attention. He again emphasised that there’s some flexibility around the country’s target of 7.5% economic growth for 2014, maintaining jobs and incomes are more important than achieving the target per se.
“We set the growth target at around 7.5% because we are thinking about ensuring employment, benefiting people and increasing the incomes of urban and rural residents,” Li said.
The slowdown in China is in large part the product of government’s attempts to control financial pressures, such as rising debt levels among government and private investors, and the continuing problem of hot money flows.
These policies have seen monetary policy tightened and several credit squeezes in the past nine months. The decision to let the small solar company default on its debt was seen as part of this tougher policy aimed at speculators.
However, some analysts believe that the government has already moved to ease the pain and stimulate the economy by engineering a sharp fall in the value of the yuan in the past two weeks, which will support exporters, and allowed credit conditions to ease which will allow banks to resume refinancing their business and other customers.
