China Data Excuse for Pullback

Euro loses a full cent as traders were unable to extend gains above the key 55-day moving average (a technical level not broken with conviction since April). China’s weak data was seen as an excuse to take profit from last week’s risk-on positioning, but support is so far seen at $1.2190. Similarly, GBP/USD is widely seen supported above $1.5520, a trendline extending from the June low.

China’s July CPI slowed to 1.8% from 2.2% (vs expectations of a lower 1.7% figure), which is the lowest level since January 2010. Notably, the decline has continued despite the rise in corn and wheat, which was instrumental in raising food prices in China. Chinese July retail sales slipped to 14.4% in June from May’s 14.5%, which is the lowest since January 2007. Industrial production remains at three-year lows while fixed assets near 10-year lows.

Any further deterioration will be reason to worry that a Chinese stimulus package is inevitable. The only challenge with another stimulus is the potential overheating on property prices at a time when monetary policy must remain accommodative.

Continued slowing in Chinese inflation translates into an economic slowdown as the element of falling demand is playing a greater role, and is not just a monetary or commodity phenomenon.

Unlike G10 equities which are near three-month highs, Chinese equities are barely off their three-year lows. The deteriorating fabric for Chinese investors is manifested via its falling equities (12% off their 2012 highs), weakening property prices and lower deposit rates.

Looking ahead, as equities hit three-month highs, they remain on target for a preliminary objective of 1412-1415 by month end. July 2012 appeared technically similar to March 2010 and August 2012 may end up looking like the intermediate top of April 2010.

Aussie July jobs figures came out at a higher than expected +14K from previously revised -28K, while the unemployment rate fell to 5.2% from a revised 5.3%. Another round of good Aussie news further delays the next RBA cut and attempts a move towards 1.07. Medium term support is seen holding above 1.04, following further scaling down of RBA easing expectations.

The break out above the April trendline suggests 1415 is a minimal target, at which point traders will want to retest the 2012 high of 1422. Without questioning the long term effectiveness of the Fed’s QE3 and the efficacy of the ECB’s next LTRO, markets are aware of the obligatory rebound in equities and risk appetite once these policy measures are unleashed. As such, the inevitability of further central bank stimuli cannot be ignored by equities, which explains our ongoing stance that G10 equities shall remain supported at last into end late Q3 (avoiding any declines of more than 7% from current levels).