This morning, it seems like the risk sentiment has turned positive once again in financial markets. Stock markets have turned higher, risk currencies such as the commodity Dollars and the Euro are also 50-60 pips higher, while safe havens are lower as USD/JPY climbs up.
Earlier this morning there was a round of economic data coming out of China and the numbers look positive at first glance. M2 money supply, which represents the total quantity of domestic currency in circulation and deposited in banks, increased as did new loans for March. This means that the fiscal and monetary stimulus are filtering through in the monetary system in China.
But what seems to have helped improve the sentiment more is the increase in trade balance. The USD denominated trade balanced jumped from around $4 billion to above $32 billion and the total trade balance increased to ¥220 billion against ¥178 billion expected. This has led traders believe that the slowdown in the Chinese economy is probably over.
But, the catch here is that as a whole in Q1, Chinese dollar-denominated exports grew by 1.4% Year-on-Year while imports shrank by 4.8%, hence the increase in the trade balance. This means that the domestic demand in China is softening further. While exports might have increased a bit, imports have dived considerably. So, there’s not much to be optimistic about from these figures. But the market has taken the face value of this morning’s economic figures and is running away with it as risk assets continue to climb while safe havens slip lower.