Market Drivers November 9, 2012
Chinese data beats helping risk rally in Asia
EZ data continues to miss, Greece will not default on Nov. 16th
Nikkei -0.90% Europe -0.34%
Oil $85/bbl
Gold $1736/oz.

Europe and Asia:
CNY Retail Sales 14.5% vs. 14.4%
CNY IP 9.6% vs. 9.5%
EUR French IP -2.7% vs -0.9%
GBP Trade Balance -8.4B vs. -9.1B

North America:
USD U of M 10:00

Risk currencies traded lower in morning European session despite better than expected data out of China as concerns over Greece and continuously weak economic results from the EZ region weighed on investor sentiment on the last trading day of the week. Chinese economic data proved better than expectations with Chinese Retail Sales and Industrial Production both printing better than forecast with the latter rising to 9.6% from 9.5% eyed and the former increasing by 14.5% versus 14.4% consensus calls. Fixed Asset Investment also rose to 20.7% from 20.6% originally projected. Inflation remained tame at 1.7% versus 1.9% anticipated.

Overall, the news confirmed that China has so far engineer a soft landing in its economic slowdown as growth slowed from the torrid pace of 10% plus annual rates of the past decade to a more subdued but still impressive 7.0% plus rate. China’s statistics chief estimated that growth in China in 2012 would come in at 7.5% with CPI running at 4%. The steady growth rates in China’s GDP along with tempered inflation rates allow the authorities to be more flexible with monetary policy into the new year, but the economy still faces considerable risks into 2013, most of which may be out of Chinese leader’s control.

It is clear that despite their best efforts to reconfigure China’s growth away from production to consumption, exports and investment still control a disproportionate part of the country’s economy. To that end the marked slowdown in the Eurozone which has now spread to the core economies of Germany and France could severely hamper China’s export growth in the coming year.

That point was highlighted by today’s very weak French Industrial Production data which came in at -2.7% versus -0.9% eyed indicating that manufacturing in Europe’s 2nd largest economy is starting to slump. The news prompted some analysts to forecast that French GDP may actually turn negative in Q4 of this year further weighing on overall EZ GDP.

In addition to the disappointment on the economic front, investors continued to be concerned about the ongoing negotiations on Greece. EZ officials reassured the markets that the country will not default on November 16th but at the same time noted that it will need to discuss the issue in “great detail” at its November 12th meeting. This uncertainty regarding the resolution of Greek debt crisis is also starting to affect other periphery yields with Italian benchmark 10 year now back above the 5% mark.

As some analysts have pointed out, one possible reason that EURUSD has not fallen further was due to support from Asian central banks that hold do not touch options and are trying to protect the 1.2700 level. However, their support can only last so long and if risk aversion flows accelerate into the North American session the shorts will make a very concerted effort to break that barrier.

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