China Growth Concerns weigh on Markets

Just when we thought the markets might start to stage a rebound with all the talk of support for Greece, they decided to start worrying about growth in China. News that Chinese Banks may not reach their lending targets in 2012, sparked the concerns which have seen the kiwi drop back 0.50 cents from its overnight highs of .7565 vs. the USD. The US sharemarket is also down around 0.50% on the news as well. However, many commentators, ourselves included, expect a series of stimulus measures from China in the coming months. Such measures will include cutting the Banks Reserve Ratio requirement, currently 20% down towards 16% which could free up an extra USD 250 billion of money to lend as well as a cut to the official cash rate for loans which is currently 6.0%.

In Europe, there was a more positive air with sharemarkets in the main centres posting 1.0% gains with Greece as always the exception. The Greek sharemarket fell 4.0% to a 22 year low.

In the currency markets, the Euro was again under pressure falling to the low 1.2500 area vs. the USD as investors continue to sell the Euro as a hedge against a possible Greek exit. The bets on the Euro’s on-going decline are now at a record level, so if there is some positive compromise reached over Greece, the Euro could rebound sharply. Weaker than expected data from the German Purchasing Managers Index (PMI) also weighed on the Euro. We still expect rate cuts from the ECB, as well as another round of money printing to support the Banking system.

Locally, yesterday’s budget had little impact on the currency or the domestic interest rate market. The Governments fiscally prudent approach had been well flagged and so got the required tick from the ratings agencies. The Governments growth forecasts assume a huge surge in new home building, presumably as part of the Christchurch rebuild. Outside of this it looks like more of the “muddle through” approach that has been a hallmark of the present National Government. NZ continues to look well positioned relative to most of the rest of the world and this should provide support for the currency over the longer term.

Sharp sell-offs have generally been followed by equally sharp rebounds

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