Why the Loss of Momentum? - Ahead of Wall Street

Tuesday, March 11, 2014

If the market had anything else to look up to, it would likely have ignored the news about China's export shortfall or the ongoing Ukraine-Russia standoff. But markets don't have anything else going on at present – the Q4 earnings season is now in the rear-view mirror and we don't' have much on the economic docket either. This data void appears to be making it difficult for the market to sustain its recent positive momentum.
 
We shouldn't put too much stock in any one economic data point coming out of China, particularly the export numbers given how exposed the country's export account is to over- and under-invoicing by exporters. This manipulation of the export numbers, which was reportedly a big deal in the year-earlier period, is a direct result of the non-convertibility of the Chinese currency. Then there is the issue of Lunar Year, which always tends to have a distorting effect on data.
 
But beyond all of this, an -18.1% drop in Chinese exports would imply a sharp drop off in demand for the country's products elsewhere. But we know that's not the case as the economic outlook for the U.S., European, and even Japanese economies has been fairly stable. Bottom line, there are legitimate questions about China's growth outlook that have been around for quite some time. Other recent economic indicators like inflation, purchasing managers' surveys and industrial production data have also been pointing towards some loss of momentum, but not to the extent implied by the export shortfall.

The market came back really strong from the January sell-off, with the broad market indexes essentially at record levels. But stocks don't go straight up all the time and the current lack of a directional thrust in a low-news backdrop is hardly unusual. With not much on the data docket over the coming days, we shouldn't expect much from the market either.
 
Sheraz Mian
Director of Research