China: Pandemic? What pandemic?
October 20, 2020
Despite a first contraction in output since official records began in 1992 earlier this year, China has bounced back and third-quarter GDP rose to 4.9% year-on-year (yoy) from 3.2% in the second quarter, short of the consensus estimate of 5.5%. Relative to historical norms though, growth is still below trend. Details of the data release show an increasingly broad recovery, keeping the country on track for positive year-on-year growth. The pandemic seems to be almost forgotten.
While GDP was lower than expected, both industrial production (6.9% yoy) and retail sales (3.3% yoy) accelerated in September. Certain sectors, such as tourism, education and travel are still lagging, but solid spending during the Golden Week holiday bodes well. Even the shortfall in GDP growth relative to consensus should not be seen as pessimistic, as it was primarily due to an unexpected surge in imports, indicating solid demand. The outlook for the remainder of the year and beyond remains cautiously optimistic. However, as the virus is making a comeback in several countries, forcing the re-implementation of restrictions, export demand could weaken in the coming months. Concerns about rising debt levels have also started to emerge. Additionally, fixed-asset investment has been surprisingly weak, relying primarily on government-led spending to compensate for reduced private investment. That said, a muted market reaction (CSI and Shanghai Comp opened slightly down, the yuan was stable) to these numbers confirm that the GDP miss was taken in its stride thanks to the solid September data.
China’s recovery is broadening across sectors and growth looks set to accelerate further. Keep an eye on the US election for impacts on US- China relations and trade. Given the solid progress on economic output, further monetary or fiscal stimulus does not look imminent.
European indices ended mostly lower on Monday, in a session marred by Euronext's technical issues: trading in equities and other securities halted for about three hours after the open.
Coronavirus headlines were still dominated by tightening of restrictions amid surging new infections: Wales announced it would go into lockdown until 9 November, whilst Italy has implemented new measures, although somewhat softer. Vaccine optimism remains high, with news this weekend that the Oxford- AstraZeneca's candidate could be rolled out as soon as December. There's been some focus on eurozone policymakers warning over the EU recovery as new restrictions are put in place by nations to curb the spread of the virus. European Central Bank chief Lagarde called on EU leaders to make the recovery fund a permanent tool.
Brexit was also in focus after Cabinet Minister Gove was quoted saying that "the EU trade talks are in effect ended", adding that the UK is "increasingly well prepared for an Australia style exit" and recognising "there will be turbulence".
US equities finished lower Monday. There was not much sector dispersion. Big tech, media, credit cards and biotech were among the worst performers. Airlines, autos and semis held up better. Treasuries were mostly, with the curve steepening. The dollar weakened vs the euro and sterling while gaining a bit vs the yen. Gold finished up 0.3%. WTI crude oil finished down 0.1%.
Fiscal stimulus received most of the headlines on an otherwise quiet day. Despite renewed optimism for a pre-election deal, disagreement on language remains. Biden is firmly ahead of Trump in the national polls, although battleground states are closer and there is much more uncertainty surrounding control of the Senate. In terms of coronavirus, US cases and hospitalizations continue to tick higher. Earnings beat rate is above trend but reaction to early reports suggests the bar is higher.
Asian markets are mixed to weaker Tuesday. China is little changed. The Nikkei is logging mild declines. The People’s Bank of China left the loan prime unchanged as expected.
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