The big concern, at least for overnight trading, is that China’s economy may be slowing a bit and markets were reminded about that prospect after BHP suggested iron ore demand was flattening. The thing is, BHP was actually optimistic on Chinese growth prospects – as was Rio Tinto when it suggested that iron ore production would actually need to increase over the next seven years to meet rising Chinese demand, notwithstanding signs of a slowing now. So I’m not sure that the comments were particularly bearish. Perhaps it was the combination of that and the decision taken by the Chinese government to increase petrol prices – the second time in six weeks.
Equities were spooked however, and in Europe, the major indices were down 1.4 per cent on the Dax, 1.3 per cent on the CaC and 1.2 per cent on the FTSE. The S&P was offered from the open and was off 0.8 per cent at the low, before a subsequent bid saw much of that retrace. At the close, the S&P was down 0.3 per cent with energy, industrials and basic materials leading the index lower – although energy prices and stocks aren’t just falling due to Chinese growth fears. In fact I think the major reason why we saw crude down 2.3 per cent on WTI ($105.6) and 1.1 per cent on Brent ($124.4) is because the Saudis came out and said they could increase production by 25 per cent – immediately – if they needed to.
Oil prices are an extremely sensitive issue for policy makers – recall recent comments from Obama and David Cameron that oil may need to be released from strategic petroleum reserves. Clearly a big effort is being put in to jawbone prices lower, although the reality is that current global monetary policy makes this a very difficult task – as do events in the Middle East. In any case, while energy stocks were smashed, financials and consumer services posted modest gains. As for the other major indices, the Dow was down 68 points (13170), the Nasdaq fell 0.1 per cent (3074) while the SPI fell 0.2 per cent (4275).
Despite moves in the equity and commodity space, US treasuries actually didn’t do a great deal. The 10-year for instance traded within a 7 basis point range and finished at 2.359 per cent from 2.36 per cent. Similarly the 5-year yield was unchanged at 1.19 per cent on an 8 basis point range. The 2-year was up 2 basis points to close at 0.39 per cent. Aussie futures for their part were up 2 ticks on both the 3s (96.25) and the 10s (95.69).
As for forex, the Australian dollar is off almost big figure (from 1630) to 1.0482, euro was little changed at 1.3223 and it’s the same for sterling at 1.5860. The yen was then up to 83.72 from 83.44. Finally for the price action, gold was down $7 to $1649, silver fell 3.4 per cent and copper was down 1.8 per cent.
Other important releases to note were German producer and UK consumer prices. Both indexes don’t really show any let up in inflationary pressure. UK CPI was actually significantly stronger than expected in February, rising 0.6 per cent compared to the market forecast of 0.4 per cent. The annual rate dipped as base and VAT effects drop out, but it is still well above target at 3.4 per cent (from 3.6 per cent). Annualising the last six months, which doesn’t include VAT, you still get CPI at 2.8 per cent which is clearly too high when you have zero interest rates and you are printing money. For Germany, producer prices rose 0.4 per cent in February (after a 0.6 per cent rise) to be 3.2 per cent higher annually (was 3.4 per cent in January). Over in the US, housing starts fell 1.1 per cent in February which was weaker than the 0.1 per cent rise expected, although the January lift was revised up to 3.7 per cent from 1.5 per cent so overall, the number of starts 698,000 isn’t too far off expectations (700,000).
Nothing much out for Australia today – DEWR skilled vacancies at 1100 AEDT and for NZ we see the fourth quarter current account balance at 0845 AEDT and credit card spending at 1300 AEDT. Tonight it's worth checking out the BoE’s minutes, the UK budget and US existing home sales.
Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
Follow @AdamCarrEcon on Twitter.
SCOREBOARD: China concerns
Traders worry the Chinese economy may be easing off, but is the evidence there?
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