Daily analysis 15.04.2016

Slightly better Chinese publications should be positive for the global sentiment and stabilize the yuan. Sunday’s Doha meeting is expected to be important for oil in the short run. In the morning, the zloty remains weak, but stable.

• 15.15: Industrial production from the US (survey: minus 0.1% m/m).
• 16.00: Consumer confidence index according to University of Michigan (survey: 92 points).

Better data from China

The data from China brought a lot of attention in recent quarters. Beijing has become an economic barometer for the world and a major threat for some countries. Today’s publications of major macroeconomic indicators are slightly better than expected, but probably will not convince the pessimists on possible medium term stabilization.

Chinese GDP rose in Q1 by 6.7% y/y. The reading was in line with economists’ expectations and was in the range of the most recent projections announced by Prime Minister Li Keqiang for this year. An economist’s survey published by Bloomberg stated the slightly above median retail sales reading (10.5% y/y vs 10.4% y/y), as well as the report on industrial production, which rose by 6.8% y/y, the fastest pace since mid-2015.

Many economists who analyze Chinese data, doubt their reliability. As a result, beside the official readings, they tend to follow other factors – steel production, cement or electricity. But this time the data was fairly good, especially in comparison to previous reports. However, the 24% increase of cement production was mainly caused by base effect in last year’s data and the different date of the Chinese lunar year.

When analyzing other data, we may conclude that Beijing’s tools to boost demand have worked. Infrastructure expenditures rose 20% y/y. The interest rates cuts spurred investments in real estate by 6.2% y/y in the first quarter. It is also worth noting the double digit increase in production and sales of cars.

What markets may regard as a mixed message, is that heavy infrastructure and real estate investments carry a lot of risk, and this does not bring the Chinese economy to be more balanced and focused on services in the internal demand model. It is possible that a similar conclusion lead the IMF to boost the outlook for China for 2016 and 2017, while lowering estimates for the beginning of the next decade.

Overall Chinese data should stabilize the yuan. The selling pressure on the RMB is expected to ease what was confirmed by the most recent publications on currency reserves. The readings should be fairly positive for the Asian economies and decrease its volatility. Beijing’s actions may pose higher risks for the future concerning servicing the debt of some SOE or oversupply in the real estate market.

What are the odds for the Doha agreement?

The oil market participants have been speculating about the Doha freezing agreement for weeks. Saudi Arabia and Russia are two major oil producers which are expected to cap the production on January levels. Other smaller OPEC nations are also expected to take a part in the deal.

In the morning, it turned out that the Iranian oil minister is not going to Qatar. However, for weeks Tehran has claimed that it has to regain production capacity after the sanctions were lifted, even though it was widely known that oil dropped to around 1% after the message hit the wire.

What are the odds that an agreement will happen? According to a Bloomberg survey, responses from analysts and economists were split evenly. Twenty predict that the freeze will be agreed upon on Sunday while the others claim the consensus failed to meet expectations.

Taking into the account the recent involvement from the OPEC members and other oil producers, the odds are bias toward the production cap. However, it is worth noting that since the first news about the freeze, oil has rebounded significantly. So the reaction may be meaningful but short lived, and the market may return to speculation regarding the speed of the reduction of the oil glut around the world. We may expect that the deal should not push oil prices to more than 4 USD per barrel.

On the other hand, if the talks in Qatar fail to meet expectations, oil may slide significantly. But, we should also note that the overall level of production is close to the limits of major oil producers so no country besides Saudi Arabia has a spare capacity. As a result, if talks turn to be inconclusive, the OPEC export will not rise markedly. As a result, an oil slide below 35 USD/barrel is not the base case scenario, especially considering that in environments with lower, the US production my shrink faster than expected.

The zloty is weak but stable

The situation on the zloty hasn’t changed much to either the euro or the dollar. The Polish currency remains weak but, due to neutral global sentiment, the sell-off paused. The PLN is also weak against the HUF. It dropped around 2% at the beginning of the month.

If the global sentiment remains stable, the zloty should not generate the weakness internally. However, if the risk aversion returns, the PLN may weaken markedly to the major currencies around the amount of 1-1.5 percent. On the other hand, if the risk appetite returns to global markets, the PLN may gain some value. However, the appreciation move may be slower than in the case of the forint, so it should confirm the relative weakness of the PLN.