FREE

011618 CGI Weekly Global Equities Strategy Update

In Asia, today Japan’s central Bank raised its view on three of Japan's nine regional economies, yet another latest indication of Japan's economic recovery that could fuel speculation the central bank may tighten policy. The BoJ upgraded its assessments of regions including northern prefectures and the western area that includes Osaka, citing a tight labor market, improvements in consumption and the strength in exports. The BoJ said Japan’s economy was "expanding moderately", but left its views on the other regions unchanged in the quarterly Sakura report. The BoJ reduced the size of some of its bond-buying operations last week, pushing Yen higher against the USD, the USD slipped to a six-week low on the Yen at 110.73, even as Governor Kuroda reiterated that the BoJ will continue to maintain easy monetary conditions until 2% inflation is stably achieved and stands ready to make policy adjustments if needed. Despite the talk of policy tightening, Japan's core inflation, which excludes volatile fresh food prices, rose 0.9% from a year earlier in November, well below target.

China’s General Administration of Customs announced the Chinese-US trade gap grew by +10% in 2018 to an all-time high of USD 275.8Bn, representing 65% of China’s total trade surplus and 2% of total Chinese GDP. GDP growth for the full-year of 2018 could slow to 6.4% from an expected 6.8% in 2017, as property sales and construction slow on sustained tight policies and fading market momentum and infrastructure investment decelerates on tighter local government financing. Analysts' forecasts for 2017 Q4 growth ranged from 6.5% to 7%, with modest upside surprises tipped after Premier Li Keqiang said last week that the economy is expected to have grown 6.9% last year. China will release Q4 and 2017 fy GDP on Thursday, along with December industrial output, retail sales and fixed asset investment data. Economist’s consensus estimates for GDP grew 1.6% q-o-q, easing from 1.7% in Q3.

US trade tensions with China rose earlier this week after rumours, that the PBoC was contemplating slowing or even stopping the purchases of US treasuries, however the report has since been denied by a state regulator. Nevertheless, we have been pointing to this fact and see increasing short term pressures on the 10-Year Treasuries and the USD resulting.

China’s current account surplus, with December’s trade balance reaching a far higher than expected Yuan 362Bn for the month alone (higher than last month’s Yuan 255Bn). Chinese exports remained more or less in line with expectations at +10%, pushed by clear and obvious import demand from the US and EU. The negative surprise came from imports, which were far lower than expectations, coming in flat y-o-y.

Imports have tracked the cyclical recovery in China as China has imported more commodities to continue with its infrastructure investment program.

The stronger Yuan, which we were forecasting for 2017 and 2018 (2018 target of USDCNY 6.2) is another implication of a higher trade balance, as it causes more money flowing into the economy and suggests there is limited pressure to devalue the currency much further a it will only be a matter of time before we see some slowing in China export numbers.