China -let’s all calm down

The CNY has fallen around 5% since November. That’s a lot for the CNY, but let’s have a bit of context. The CNY has appreciated at a rate of around 5% a year in real terms since 2005 (see below). What happened in 2014 was the strength of the USD accelerated the CNY’s trade-weighted appreciation, so with the USD staying strong in 2015, a decline against the USD is necessary to restore the underlying trend. As the chart shows, we might see some more CNY weakness yet, but it really isn’t a big deal in the greater scheme of things as it hasn’t even broken its underlying uptrend.

As for the Chinese equity market, it’s still above its 2015 (and 2014) lows, which is more than can be said for many European markets.

True, the economy has slowed and may only be growing at 5% or less, and combined with the attempted shift to more consumption and less investment is reducing the growth of demand for commodities, and we have seen the impact of this on commodity prices in the past year, though supply factors have also played a big role. But the weakening of Chinese demand is not noticeably killing growth in the major economies. Growth isn’t stellar, but no-one expected it to be, and recent European PMIs are reasonably encouraging, while US employment growth suggests that the services sector is still more than making up for any manufacturing weakness.

So all in all, the global equity sell off looks like unjustified panic to me. Of course, panic can continue for longer than most can stay solvent, but I am convinced this is a big buying opportunity for European equities, which remain fantastic value relative to the exceptionally low bond yields available.

For FX, the big themes remain the weakness of oil and equities leading to weakness in commodity currencies and JPY and EUR strength (and it is noticeable that the CHF has actually weakened against the EUR). But I wouldn’t get too wedded to the risk off story, especially since the lower oil price will continue to support real consumer demand, and it could of course mean more easing/less tightening globally if they get all worried about low headline inflation, providing further support for growth. I like the SEK as the biggest ultimate beneficiary of all this when the dust clears, despite the Riksbank’s threats.




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