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Softness in Chinese Economic Indicators Signals Caution for Global Risk Assets


From the Buzz & Banter: Chinese banks cut loans, and economic growth disappointed.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

I really like quotes from the Chinese philosopher Confucius. This is one of my favorites: "Our greatest glory is not in never falling, but in rising every time we fall." And, yesterday (March 13), stocks fell mainly on fears about China.

First there were worries centered on China's less-than-expected industrial production, which at +8.6% was below the +9.5% year-over-year (YoY) estimate for the two-month period (January/February).

Ditto, retail sales were reported at +11.8% versus the +13.5% estimate, the slowest pace for the period since 2004.

Third, China's +17.9% increase in fixed-asset investment was at a 13-year low, as well as below the +19.2% estimate. China attempted to "smooth" said reports by lumping them over the two-month period of January and February in an attempt to adjust for the Lunar New Year, but it was a fallacious attempt as demonstrated by reported numbers.

However, by far the worst news, if it is true, were rumors swirling that Chinese banks are going to curtail loans to industrial companies by up to 20%. And that, boys and girls, tanked stocks for obvious reasons! Moreover, as my firm's technical analyst David Hydrick writes the following:

Chinese premier Li Keqiang says debt risks are under control, and attempted to sooth worries about potential loan defaults as he reiterated the government's standard line that debt risks in China are under control, noting debt/GDP ratios are below international danger level. He also said they will enhance efforts on shadow banking regulatory measures. When asked about the slowest rate of growth acceptable without stimulating the economy, Li said that the target had been set around 7.5%, which implies flexibility in that target.

Nevertheless, yesterday the various indices came very close to breaking below their respective support levels. For the S&P 500 (INDEXSP:.INX), that level is 1845-1850. Below that, support exists around 1835-1840. Below that, support resides around 1800.

As for me, I remain an agonistic, believing that while I think we are in a secular bull market, the directionality in the near term is questionable, which is why I have an oversized position in cash. Indeed, according to my father, "Cash is an asset class for to assume that all of the opportunity investment 'sets' that are available to you today are better than those that will be available next week, next month, next quarter... is naive, and you need cash to take advantage of those opportunities!" Earlier today, news stories confirm that China is cutting loans to industrial companies by as much as 20%, but US equities traded up to start the day as things get more and more curious. We are cautious.
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No positions in stocks mentioned.
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