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Before We Forget About Our Friends in the Far East

Posted Tuesday, November 1, 2016 by
Skerdian Meta • 2 min read

We touched this subject in our first market update today, but I think that it needs more attention because good things are coming from China, and I don't mean the usual cheap toys and gadgets. As we mentioned, both Chinese manufacturing surveys posted the same number, 51.2 PMI. The manufacturing PMI is more credible because it surveys about 3,000 purchasing managers, while the Caixin PMI survey takes into account only 430 managers.

Now, 51.2 PMI is not a great number, but coming from many months of contraction, it is very encouraging. Last month, both numbers were just above the 50 breakeven level, which was a positive signal since they moved above the 50 level. However, it still was too close to contraction. Today´s numbers show that the dark times are finally over for the Chinese economy.

I don´t know if you realize the importance of this, but you must understand that the world now has only three massive economic hubs which drag the global economy up or down: the US, the Eurozone, and China. If one of them falls into contraction, then the global demand would fall and all the other economies would be affected, particularly during these fragile times. Remember that only six months ago, the world economy was on the edge of the cliff due to the negative investor sentiment which came from the Chinese economic contraction.

Besides that, the Eurozone economy was in doldrums until a couple of months ago. So the world was only left with the US power engine, but even that wasn't strong enough to pull all the wagons. In fact, the other wagons were pulling the US economy down.

But now, the situation seems a lot better; the US economy has picked up the pace in the recent months. Most sectors of the Eurozone economy have improved considerably and China is catching its breath, too. This changes the big picture of fear and uncertainty we used to see until a few months ago. The global economy is far from where it is supposed to be, but at least the three major economic hubs are moving in the right direction. You´d be surprised how much these three economies can affect your country´s economy and your own income as well. So, it´s a relief seeing them better off.

But that was not all, the king of comedy Kuroda amused us again. He was all over the place all night long, but two comments stand out as the funniest ones:

– The market has responded smoothly to the BOJ actions

– The BOJ will reach its 2% inflation target by 2018

Regarding the first comment, the forex market didn´t even care when the BOJ brought the interest rates into the negative territory and started their big QE programme. Do you really think the market would care if it wasn´t for the latest shift in the market sentiment?

The second comment is even funnier, and Kuroda is making a habit of it. Can anyone believe that inflation in Japan will reach 2% in a bit more than a year after decades of low inflation and deflation? Even now that oil prices are more stable and the inflation in other developed economies has picked up, Japan is very close to deflation. Well, at least we are offered some free comedy whenever BPJ´s Kuroda hits the screens.

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