China’s Vicious Circle

Equity markets opened lower this morning in Europe following a fall in Chinese index at the closing bell, which damped investor confidence and highlighted what we have already thought, that without central Government intervention, then the market there remains susceptible to a sharp fall.  We saw industrial profits data in China come in unexpectedly lower at -0.3%, which is a 15 month low.  The knock on effect of this on demand for precious metals was immediate, and we are seeing Gold trading below $1100 an ounce, and we also saw Brent Crude oil price touching $54 a barrel, which is below level it last tested at the start of 2015. If it breaks through this level, then expect more pressure to build as more investors build on their short positions.  We note with caution, Volkswagen’s statement last week that the down turn in China may impact their sales by approximately EU1bn if sales don’t pick up from June levels, however, we feel this is more of a warning shot as they have no plans to cut production to match demand for now.

 

On the positive tack, we saw  a sharp increase in German business confidence now that the Greece situation has subsided for now, this saw the Euro increase by c1% on the announcement t see it trade back above 1.10 against the US Dollar once more.  With equity futures indicating that the US will follow Europe and Asia lower this afternoon, then we shall continue to monitor these markets closely to see if there is any impact of slowing consumer demand brought about these moves in the stock market.

 

Investment Manager

Jeremy Walker