MARKETS SPECTATOR: Chinese turn

China's latest release of key economic indicators has given confidence to the market – not least iron ore investors – while there is also hope in US talks.

Iron ore surges

Fortescue Group, Australia’s biggest pure play iron ore miner, has surged today, helping to lead the market higher following the solid Chinese data over the weekend and a 4-plus per cent rise in spot iron ore prices over the last seven days.

The recovery in China looks to be developing momentum following another very strong set of Chinese economic releases yesterday. The latest read into inflation, as well as industrial production and retail sales, all came in slightly better than markets had forecast, which is another step in the right direction.

It’s almost the perfect set of figures for the world’s largest developing nation. Growth is definitely trending higher while inflation, which has been a problem for the best part of two years looks to be under control at half the pace of this year’s target.

All this will help support the leadership transition as it gives the new regime more flexibility than the past few years. There’s still plenty to be done on the structural reform front but I think that will slowly get sorted out over the coming years.

From a markets perspective, this can only be good for the local stock market. Much of the performance this year has been powered by the high yielding sectors and stocks, especially the financials, which are so heavily weighted in the S&P/ASX 200 index.

With the data out of China continuing to improve, I think we should slowly start to see the big resources names like BHP and Rio Tinto join the party as everyone realises that China isn’t heading for the much talked about ‘hard landing’.

Much of the investment community have little to no Chinese exposure. Even though it's already happening to a degree, more and more participants are going to be forced to start reweighting back towards Chinese facing assets, especially fund managers that are benchmarked against indices that contain a China component. They will no longer be able to afford being underweight for risk of further underperformance.

With so many China-facing companies, we expect to see the Australian market benefit significantly.

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Source – Iress

In the chart above, which represents all the major pure play iron ore miners, you can see that they broke out above the long-term downtrend line. After the initial move higher, they have drifted lower over the last month or so. However, the last few days has seen price rally sharply, breaking up through the short-term downtrend line, which is a very encouraging sign.

Fiscal cliff hopes receive boost

On top of the Chinese data boost, there’s further encouraging signs on the fiscal cliff talks sifting through. Sentiment is really hanging in there at the moment, and I think the announcement this morning is solidifying the fact that progress is slowly being made, although there is still plenty of water to flow under the bridge.

This morning it was reported that both parties had met on Sunday, US time to continue discussions over the looming fiscal cliff. What seems to have come from this meeting is reports that more and more senior Republicans are giving up their opposition to higher tax rates on the rich, which if true to an enormously encouraging sign.

Bob Corker, a senior Republican senator, said he believed that agreeing to Barack Obama’s demand for an increase in tax rates from 35 per cent to 39.6 per cent for the wealthiest American was "the best route for us to take”.

"There is a growing group of folks that are looking at this and realising that we don’t have a lot of cards as it relates to the tax issue, before year-end," Mr Corker said.

Eyes on Europe this evening

Despite the positive developments that have underpinned gains across Asia, there is the potential for some speed humps to emerge in Europe.

Over the weekend, Italian prime minister Mario Monti, who has been absolutely crucial in helping to stabilise the crisis in Europe, told Italy’s president that he was prepared to resign as soon as parliament passes a pending budget law.

So all eyes will be on how European markets react to the news this evening, especially the Spanish and Italian bonds and their spreads to German bunds. These spreads have narrowed considerably over the last few months so any widening and increase in volatility could see eurozone concerns reawaken.