Markets Apr 17

Markets rally as China contraction less than feared

GDP of the world’s second largest economy shrank 6.8% in the first quarter, which was less than expected

Markets rally as China contraction less than feared
A restaurant area in Beijing is quiet on April 17, 2020, after the coronavirus outbreak. China has just released GDP figures for the first quarter that were stronger than expected. Photo: Yomiuri Shimbun via AFP

(ATF) Financial markets are broadly higher as China’s economy contracted by less than expected in the first quarter. In the first quarter the GDP of the world’s second largest economy shrank 6.8% - an AFP poll of 14 institutions expected the economy to have shrunk 8.2% from a year ago in the first quarter, while a Bloomberg poll tipped a 6% decline and Reuters 6.5%.

Data also revealed China’s fixed asset investments fell 16.1% and March retail sales fell 15.8%, all worse than expected. Industrial output was an outlier declining -1.1% versus expected -6.2%. Bloomberg had polled for a 6% decline and Reuters 6.5%.

“After an unprecedented contraction in Q1, we expect China’s GDP growth to improve sequentially as we move further into 2020. However, given that the global outbreak continues to deepen with shutdowns seen in increasing countries, we see strong headwinds from external demand going forward. The production suspensions in other economies could also disrupt China’s production in certain global-chained sectors,” said Michelle Qi, Chief Investment Officer for Equities at Eastspring Investments.

In stocks, Japan’s Nikkei 225 is up 2.6%, Australia’s S&P ASX 200 is 2.1% higher, China’s CSI300 has risen 1% and Hong Kong’s Hang Seng index is up 2.4%. Regionally the MSCI Asia Pacific index has advanced 2%.

Oil prices also rose as the roadmap on the reopening of the US economy became clear with Brent futures up 2.7% and WTI 0.2% higher after OPEC lowered its forecast for 2020 global oil demand. OPEC now sees a contraction of global demand of 6.9 million barrels per day (bpd), compared with a small increase predicted last month. “Downward risks remain significant, suggesting the possibility of further adjustments, especially in the second quarter,” OPEC said.

And with the global infections count now exceeding 2.1 million cases and a total of 143,844 deaths, the economic devastation is forcing world leaders to take a conservative approach to reopening their economies. 

US President Donald Trump acknowledged the decision to reopen was up to the governors of individual states and backed off from a quick loosening of guidelines. “Under these guidelines, states will reopen one step at a time, rather than all at once. The guidelines will empower governors to tailor the phased reopening to address the situation in their State."

Sovereign credit default swaps (CDS) are tighter with the Asia IG Index 7 basis points tighter at 112/115. China's 5-year CDS has moved in by 2 bps at 40/42 bps, Indonesia is 14bps tighter at 184/191 bps and Vietnam has moved in by 10 bps wider at 240/290 bps. China Travel Service has price a 5-year, 10-year two trancher at 40/50 bps tighter than the initial price guidance and Lenovo has issued initial price guidance for a 5-year deal which will price later today.