China overtakes Japan's economy, market reacts

Something we have alluded to in previous posts became official overnight: China overtook Japan for the title of "world’s No. 2 economy." Following 30 years of relentless hard work and unwavering determination, the country can now boast that it is, in fact, on course to capture the top global economic spot as well, in about another two decades, and wrest it away from the United States.

This rosy future is, of course, something that will only come about provided that there are no social ‘bumps in the road’ such as the ones you will read about, further below. Suffice it to say that the head of China’s Bureau of Statistics cautioned earlier this year that we should all have a ‘sober understanding that China remains a developing nation.’ One saddled with a large segment of its population still in poverty. However, the ‘expendables’ should be viewed as anything but. More on that, at the end of this post.

Mind you, many an economist warns that using quarterly data to compare Chinese versus Japanese GDP has its own risks and that the two countries continue to overtake each other, depending on the season and the metrics used for such calculations (such as forex differentials, for example). At any rate, the news from China helped set into motion a set of market moves overnight, the echoes of which were still being felt this morning.

Specifically, the U.S. dollar was mostly lower on the news, losing 0.54% on the trade-weighted index and reaching 82.44 at last check. Risk appetite was initially tempered by the news that China achieved such a feat mainly on a quite disappointing slowdown in Japan’s Q2 GDP. The Japanese economy is now slated to grow at only about 1.4% next year, as against earlier projections calling for a 1.7% rate of growth.

The euro, on the other hand, gained just a tad, rising to $1.280 against the greenback. Eurozone inflation picked up the pace, according to reports issues this morning. The region experienced a core price rise of 1% (with an overall reading of 1.7%- the highest in 20 months). Meanwhile, surprise! – net foreign purchases of U.S. long-term debt instruments rose by about $9 billion in June, even as those same investors sold U.S. equities and corporate bonds on a net basis.

One more forum-based urban myth was dealt a bit of a blow with this morning’s news. Recall that –for most of 2009- we were solemnly promised not only the demise of the US dollar, the US stock market, the US housing market, and assorted other markets, but also the advent of a tsunami of loan defaults. The dominoes entailed –in short succession after the mortgage delinquency debacle-auto loans and credit card loans.

Well, Capital One (yes, the one with those friendly barbarians at the gate) announced this morning that its credit card defaults fell for the fourth straight month. This is the third largest issuer of little bits of plastic bearing the VISA logo, folks. What else did Capital One have to report? That its auto loan charge-off rate was 2.6% in July – down from 2.72% in June. Charge-off rates and delinquency rates also fell at Capital’s international operations. Hello, hello.

U.S. stock index futures indicated a lower opening, as the Japanese GDP data had market participants fretting about global economic conditions despite China’s advance in the race. The Dow finished its worst performance in a month-and-a-half last Friday following poor U.S. economic data and a fretting Fed that appears to be out of ammo with which to stimulate growth.

On the back of such apprehensions, gold prices added nearly one additional percent to Friday’s closing values as the market opened for a new trading week. Spot prices came within striking distance of overhead resistance thought to be found just above the $1230 round figure. The yellow metal opened with a $9.40 per ounce gain this morning, and was quoted at $1224.80 on the bid side.

The most recently available CFTC data indicates that the speculative length for COMEX gold rose for the second week in a row. Gross long non-commercial gold positions on the exchange amount to 747 tonnes (the net long figure is 669 tonnes) as of last week, up seven tonnes from the previous reporting period.

Analysts at Standard Bank (SA) note that: “While the rise in speculative longs is still marginal and well below 975 tonnes reached in May, non-commercial shorts continue to decline. This may indicate that short positions are now less confident of a gold price decline in coming weeks.” Over the weekend, some physical offtake ahead of a festival next week was noted in India, but not all that much, to be sure.

Once again, our local sources confirmed that at levels above $1,200 per ounce, local would-be buyers turn into willing sellers – the calendar, notwithstanding. Commerzbank metals analysts opine that sharp gains in gold could be truncated by the ebbing of physical demand from the all-important jewellery segment (as seen in Asia).

None of this has stemmed the flow of ultra-bullish news from permeating gold forums once again. Why, there is even a trend to quote (gasp!) Goldman Sachs (you know, the uber-evil perpetrators of gold price suppression/manipulation schemes) as the best evidence of an upcoming gold ‘moonshot’ (even if Goldman only sees $1,300 in six months’ time). Now that they have said that, they are credible, folks. Whatever suits the agenda…

Silver advanced a dime, opening at $18.24 per troy ounce. Meanwhile, platinum and palladium staged their own mini-recovery, with the former rising $8 to start at $1529.00 per ounce, and the latter climbing $2 to the $478.00 level. No change was reported in rhodium, with a quote of $2,070 on the bid. For the time being, news of GM’s impending IPO offering is lending support to the noble metals group.

At what point the weak Japanese GDP data and global slowdown worries might come to impact the industrial and noble metals complex, remains to be seen. For the moment, the markets awaited the release of NY Fed data relating to the Empire State’s manufacturing activity this morning. The figures showed a bit of an improvement in the region’s conditions and the findings helped stem losses in Dow futures.

Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America

Websites: www.kitco.com and www.kitco.cn

Blog: http://www.kitco.com/ind/index.html#nadler

About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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