While China‘s trifecta miss of GDP, Retail Sales and Industrial Production all coming lower than expected was likely a factor in the overnight rout of gold, the initial burst of selling started well before the Chinese data hit the tape, or as soon as Japan opened for trading with forced financial institution selling to prefund cash for any and all future JGB VaR-driven margin calls. It was all downhill from there, literally, with overnight selling of gold punctured by brief burst of targeted stop hunting, sending the metal down $116 per ounce, as spot touches $1385 after trading nearly at $1500 yesterday and down $200 in 4 days. End result, whether due to a re-collapsing global economy, margin calls, fears forced Cyprus gold selling will be imposed on all other insolvent European countries, coordinated central bank slams, hedge fund positioning, long unwinds, liquidations, fears about future demand, or whatever the usual selling suspects are, is that gold tumbles an unprecedented 7.8% on 230,000 contracts in one day, and well over 10% in two days, pushing the yellow metal 14 day RSI band to 18, meaning it is now most oversold since 1999. In brief, it is an all out panic, with Goldman still telling clients to sell, i.e., buying every shiny ounce all the way down (not to mention India, where accordingto UBS Friday demand was double the average).
Below are some banks’ takes on the overnight action via BBG:
- Unclear at this stage if there’s a clear link between the decline in gold prices and the currency markets; China’s weak 1Q GDP data probably had a more direct impact on currencies this morning than gold, Bilal Hafeez, strategist at Deutsche Bank, says in interview
- Commodity prices underwent some position adjustments on Friday, unclear on cause
- Overall commodity cycle will be important going forward for currencies such as AUD and NZD
- Impact of decline in gold price was seen in commodity-related currencies like AUD and NZD; some unwinding in the JPY was also noted; EUR and GBP have been largely steady on the gold move, Rohan Ramchandani, head of European spot trading at Citigroup, says in interview
- Gold decline may have been related to some break in technical levels and the general improvement in global risk appetite
- Gold drop may have some more room to run in short-term but in the longer-term, gold should be supported, and likewise the commodity currencies; market has been comfortably long on the gold trade since the financial crisis
- Impact of gold decline on AUD should be buffeted by the easy global liquidity conditions, Ian Stannard, strategist at Morgan Stanley, says in interview
- Expect AUD to hold up in recent trading range even with the decline in gold prices as long as equity markets continue to provide a positive signal and there’s prospect of Japanese asset reallocation overseas
- While gold should decline in the longer term on USD strength, short-term risk is financial dislocation, Chris Turner, strategist at ING, writes in note
- Pickup in gold volatility may see increase in the 15% haircuts on gold’s use as collateral at major financial exchanges; gold has become a strong source of collateral since the global financial crisis
- Gold collapse has sparked some unwind in USD/JPY
- Plunge in prices of precious metals has caught market attention, suggesting note of caution for risk sentiment in general, Jordan Kotick, global head of technical strategy at Barclays, writes in note
- Break in gold and silver’s multi-year range lows are forcing liquidation across board, not just in USD terms but also when priced in almost any currency
- Markets may unsettle, risk of near-term correction in many recent trends such as JPY crosses, AUD/USD and USD/CAD
- Gold collapse on break of 1,522/25 key support has forced copper, oil to take a beating; CAD is weaker while JPY correct seems to be getting legs
In other words, nobody has any idea what is going on, but is piling on to spread the confusion. Which, of course, for those who only care about the ongoing dilution of global fiat, which shows no signs of halting especially with the global economic deterioration accelerating, courtesy of central bank printing, a very welcome opportunity to paper dollar cost-average much lower.
Speaking of deteriorating economics, here is a brief recap of the Chinese data via SocGen:
The week opened with a truckload of unpleasant surprises from Chinese activity data. GDP growth decelerated unexpectedly to 7.7%yoy in Q1 from 7.9%yoy previously. March industrial production and fixed asset investment also came in decisively below street expectations, despite accommodative liquidity conditions. The data disappointment shocked down prices of all kinds of risky assets, from the AUD, commodity prices, to stock markets across the region. We do not think Q1 marked the end of recovery, as the lagged impact of rapid credit growth in the past few months should kick in later. However, at the same time, the latest data firmly support our call for a weak and short-lived cyclical recovery of the Chinese economy in 2013.
China’s economic growth unexpectedly decelerated to 7.7%yoy in the first quarter The Chinese economy grew 7.7% yoy in Q1, below market expectations (Cons. & SG 8%) and down from 7.9% yoy in Q4 2012. The biggest surprise to us was the sharp slide in the investment contribution (2.3ppt from 3.9ppt in 2012), despite the clear acceleration in credit growth since Q4 2012. Consumption – private and public combined – contributed 4.3ppt, only marginally higher than the 4.1ppt in 2012 but substantially short of the 6.4ppt in Q1 2012. As we expected, net exports were a big plus, adding 1.1ppt to Q1 growth (vs. -0.2ppt in 2012).
Retail sales registered a 12.6%yoy growth in March, in line with expectations (Cons. 12.6%, SG 12.5%, Jan-Feb 12.3%). But such a pace still suggested a fairly soft momentum of consumption, by China’s standard. The impact of anti-corruption measures was easily spotted, with the catering sector mired in contraction (-1.1%yoy in March). Other major drags were car and petroleum sales. Comparing to December, these three categories subtracted 1.2ppt, 1ppt
and 2.1ppt from the headline growth, respectively.
Industrial production growth slid substantially from 9.9%yoy during the first two months to 8.9%yoy in March (Cons. 10.1%; SG 9.7%) – the slowest pace since May 2009. Utility production was particularly weak, with power generation growth falling to 2.1%yoy in March from 3.4%yoy in January and February. In addition, textile and IT equipment manufacturing also slowed down notably. Throughout the first quarter, IP persistently undershot expectations, while export growth stayed firmly on the other side of the consensus. This latest IP reading only casted more doubt on the reliability of the strong export data in the past few months.
Consistent with GDP breakdowns, fixed asset investment (FAI) grew slower at 20.9%yoy in Q1 (Cons. 21.3%, SG 21.5%), implying a deceleration to 20.7%yoy in March from 21.2%yoy in January and February. Real estate investment growth fell back to 17.6%yoy from the surprisingly solid level of 22.8%yoy previously, indicating that developers may have started to adjust their investment plan shortly after the announcement of renewed tightening. Other property sector data were also not as upbeat as we initially thought. Property starts contracted again by 20.2% yoy in March, after only two months of positive growth; property sales growth almost halved to 26.6%yoy in March from the feverish pace in the previous two months. Given this, the well-reported surge in second-hand home transaction seemed to be largely regional.
Manufacturing FAI posted some improvement, rising 19.9%yoy in March (vs. 17%yoy in the first two months). However, those sectors that are suffering from excess capacity continued to show little sign of revival. Infrastructure investment grew apace at 26.5%yoy in March, up from 24.2%yoy in January and February. State-driven FAI remained the major support to China’s growth.
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So yeah, central banks will stop printing any minute now, and gold will go to zero, so Cyprus – please sell your gold to the Troika, Russia, Goldman or China now before it plunges to triple, double, single, or zero digit range.
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The rest of the overnight action recap comes from Deutsche’s Jim Reid:
Ahead of us this week is a busy seven days of politics, earnings and economic data. On the earnings side, about a quarter of the S&P500 by market cap will be reporting quarterly results. Setting the tone on the macro side will be the Q1 results from many of the big banks including Citigroup who report today before the US market open. This will be followed by Goldman Sachs tomorrow, Bank of America and American Express on Wednesday and Morgan Stanley on Thursday. Outside of the financials, we also have a number of tech giants including Google, Microsoft and IBM reporting earnings on Thursday. Corporate bellwethers Coca Cola (Tuesday), General Electric and McDonalds (Friday) are also scheduled to report this week.
In Europe, the Italian parliament will be holding its presidential election on Thursday April 18th to elect a successor to Giogio Napolitano. Numerous names have been floated as his successor including former Prime Ministers Romano Prodi and Giuliano Amato, and former EU Commissioner Emma Bonino, but no clear favourite has emerged. A two-thirds vote is required on any of the first three rounds of balloting, after which a majority suffices. The process is expected to last several days.
Elsewhere we can expect more rhetoric about currency wars this week as political and business leaders gather in Washington for the World Bank/IMF spring meetings beginning this Friday. Over the weekend, the US treasury fired the first shot, urging Japan to “refrain from competitive devaluation” in its semiannual foreign currency report to congress. The Treasury report also urged Japan to adhere to international commitments “to remain oriented towards
meeting respective domestic objectives using domestic instruments”. The Treasury found that no country met the legal standard to be designated a “currency manipulator” but said that China’s renminbi “remains significantly undervalued”.
We’ll preview more of the week ahead a little later, but first returning to Friday where earnings beats from JPMorgan and Wells Fargo failed to spark the S&P500 (-0.28%) to its fifth straight positive session. Perhaps weighing on investor sentiment was the commentary from both banks around sluggish loan demand and net interest margins. Away from earnings, there was no mistaking that Friday was a weak day for US data. Both retail sales (-0.4% vs 0% expected) and consumer sentiment (72.3 vs 78.6) disappointed to the downside, renewing fears of another mid-year seasonal slowdown in US data.
In terms of retail sales, downward revisions to both January and February numbers perhaps hinted at the effect of higher tax rates on consumer spending. Meanwhile, the UofM consumer sentiment index fell to a nine-month low. The index of six-month expectations decreased to 64.2 this month from 70.8 in the prior period. We’ll get further indication on the direction of US data with the Empire manufacturing survey today.
In terms of price action, commodities continued to underperform other risk assets on Friday. Indeed, if we look at a longer time horizon, the S&P GSCI index has underperformed the S&P500 by about 15% in the year to date as the commodities complex continues to decouple from equities. The most notable move was gold which closed 5% lower in its largest one day drop since 2008. The precious metal has lost about 20% since the October 2012 peak. Brent (- 1.1%) and copper (-2.4%) also had soft trading sessions on Friday, a move which has been exacerbated by lower than expected Q1 growth numbers from China overnight.
China’s GDP growth was 7.7% year-on-year for the first quarter which was lower than the median Bloomberg estimate of 8.0% and lower than the 7.9% growth seen in Q4 2012. The monthly activity indicators also disappointed with industrial production (9.5% vs 10%), fixed asset investment (20.9% vs 21.3%) and retail sales (12.4% vs 12.5%) all coming below expectations.
The market reaction to the Chinese data has been negative with most major Asian bourses trading about 1-2% weaker overnight. Across the region, commodity stocks are leading declines on Monday including 4%+ falls in mining giants BHP and Rio Tinto – partly in reaction to the Chinese data but also taking the lead from last Friday’s price action in commodities. The ASX200 (-1.2%) is underperforming other indices on the back of weakness in miners, and is under further pressure with the weak Chinese data. The AUD is 0.7% weaker against the greenback. Declines in oil (-2.1%), copper (-1.9%) and gold (-2.5%) are continuing this morning.
In the EM space, acting President Nicolas Maduro was elected as Venezuela’s president with 50.7% of vote, the national electoral office said after more than 99% of the ballots were counted. The opposition’s Henrique Capriles Radonski had 49.1% of the vote. The head of the country’s electoral council said that the “results are irreversible” (Bloomberg).
Turning to the day ahead, as discussed earlier the US dataflow continues today with the Empire manufacturing survey and NAHB homebuilders index. Citigroup reports earnings before the opening bell. Over the rest of the week, the IMF will publish its World Economic outlook on Tuesday and its semiannual Global Financial Stability Report on Wednesday.
Beyond today, the US data calendar highlights are tomorrow’s CPI, building permits, housing starts and industrial production reports; followed by Thursday’s jobless claims. Also due on Thursday is the Philly Fed survey. The Fed’s latest Biege Book will be published on Wednesday. The European data calendar is relatively light with the German ZEW survey tomorrow the major data release of note. The BoE publishes minutes from its last meeting on Wednesday. Spain will auction bonds on Thursday. The Chinese government provides an update on property prices on Thursday. In Japan, the key prints include industrial production, machine tool orders (Monday) and trade (Thursday).
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