Asia Session: More Evidence Investors May Be Disappointed Come Friday's Chinese GDP Data

Most risk assets slowly drifted lower throughout the session on the back of disappointing Chinese trade data. The data showed that whilst exports increased more than expected imports are struggling amidst weak levels of domestic demand. Thus, the market apparently jumped to the conclusion that the recent policy easing measures from Beijing are not as effective as first thought. Whilst we don't disagree with this statement, the other side of the data shows that China's exports are on the right path, chiefly because exporters are finding markets outside of Europe, in particular the US which overtook the EU as China's main export destination in the first half of this year. Overall, the market is choosing to refocus on the hard landing story, which is not surprising given the negative sentiment that has taken hold of the market since the European debt crisis began.

Despite today's figure we still think a hard landing for the Chinese economy is unlikely, although we would not be surprised if Friday's GDP figure is less than the 7.9% that the market is expecting. Recent moves by Beijing to ease policy and, in turn, stimulate growth tell us officials are worried about the health of the Chinese economy. However, some of the recent policy loosening may have been the result of yesterday's inflation data, which the government likely knew well ahead of its official release, and the same goes for the GDP data. Nonetheless, combining the fact that Beijing has the benefit of hindsight and the recent downward trend of domestic economic data there is definite scope for disappointment from Friday's GDP data. This may pave the way for more policy easing from Beijing later this year as the Government use its full arsenal of growth stimulating measures in attempt to boost domestic demand.

Earlier in the session, Rehn confirmed what the tabloids were already reporting, that Spain has been given an extra year and its new deficit targets are; 6.3% in 2012 (prior 5.3%), 4.5% in 2013 (prior 3%), and 2.8% in 2014. In return the Spanish government will reportedly pledge a EUR30 bn package of spending cuts and tax hikes to be announced on Wednesday. This, and more, will be discussed at the EU's finance ministers meeting later tonight, with the aim of having a final agreement on July 20.

In other news, NZ's house prices rose to a record level, at the same time as credit card spending increased. House prices increased 4.2% y/y and credit card spending jumped 0.3% m/m. Nonetheless, the kiwi wasn't significantly moved by the data.

Risk assets slid a bit following the comments out of Europe, but it likely wasn't a direct result of the remarks. Instead, investor sentiment was already tilted to the downside as is often the case following an almost baseless rally in the overnight sessions. AUDUSD initially jumped on the export data, before the full gravity of the weak imports number took hold, sending AUDUSD quickly through 1.0200 and on towards a session low around 1.0155. EURUSD didn't find much support around 1.2300. Thus, it was soon drifting lower, before finding some support around its weekly open.

Equity markets were initially lifted by the positive sentiment that flowed from the overnight session (including earnings results from Alcoa), but major indices were unable to hold their position in positive territory – ASX200 currently down by around 0.64% and Nikkei225 in the red by around 0.15%. Commodities are also broadly lower, despite a late fight back from oil.