China economic data

Early last week Chinese GDP growth for the March quarter came in at 6.8%, ahead of the 6.7% expected via the Reuters poll and ahead of the governments target of 6.5%. Retail sales were particularly strong, growing at 10.1% - also ahead of expectations - demonstrating good momentum in the re-balancing of the Chinese economy toward consumption.  

Muted market response

Markets initially responded strongly to this news, however this faded over subsequent days, due arguably to ongoing geopolitical concerns related to trade policy. E.g. Two weeks ago the US imposed sanctions on several Russian industrialists, including Rusal, the worlds largest non-Chinese supplier of aluminium. This week the US denied export privileges to major, State-owned Chinese telecommunications equipment maker ZTE which has maintained tension to US/China trade relations.

China's central bank delivers the biggest surprise

The biggest market surprise has been delivered by China's central bank which yesterday cut its Reserve Requirement Ratios (cash that lenders must keep in reserves to back their lending). Loosening liquidity has been interpreted as a precaution against the potential negative impacts from extended trade "negotiations". China has ample capacity to continue releasing such liquidity in defence of economic growth and stability. 

Impact to commodity markets

Higher Chinese liquidty has put a rocket under commodity markets overnight. Greater domestic confidence and liquidity in the Chinese economy has seen a surge in commodities trading (both fundamental and speculative) several times in the last decade. As we know, the marginal Chinese investor is a huge influence in setting the marginal price in these markers. Current momentum is positive, but be aware that this can change quickly. Further below we show how quickly the aluminium and nickel markets in particular have moved ahead of market expectations.

Spot Base metals prices versus Morgans forecasts - Nickel often attracts intense speculation / momentum in buoyant markets given its; 1) strong economic sensitivity, and 2) smaller market size, which amplifies price dynamics.