If we look for explanations for Tuesday’s market behavior, we might consider that markets are finally attempting to price in the accumulating geopolitical risks. However, I personally lean toward the theory that this was a reaction against Monday’s moves. In essence, we remain somewhat stagnant, awaiting the key events of the week. The real spectacle begins tomorrow, though we certainly shouldn’t ignore the information that has been coming in so far, particularly regarding China.
Are the Chinese Holding Steady?
It wouldn’t be too bold to suggest that yesterday’s information about the planned actions of the Chinese authorities didn’t appear at that specific moment by accident. The Communist Party of China wants to continue monetary and fiscal easing in the coming months. This is partly a reaction to Donald Trump’s announced tariffs on Chinese products and partly a response to a weakening domestic market. Domestic consumption in China is seen as the remedy for the country’s growing economic problems. Official macroeconomic data (which analysts view with some skepticism) leave no doubt that the authorities need to be even more active to maintain their planned growth.
Yesterday’s inflation data revealed worsening monthly deflation (-0.6%), while annual prices rose by a modest 0.2%. What may benefit citizens’ wallets is simultaneously dangerous for the economy, as it signals a slowdown. Further confirmation of these issues came today with trade balance data. In theory, a year-over-year export increase of 6.7% might seem positive, but it fell short of the 8.5% forecast and the previous result of 12.7%. And that was the better news. Year-over-year imports fell by 3.9%, marking the worst result since September 2023. This follows an already weak previous month (-2.3%) and forecasts predicting a positive turnaround (+0.3%).
Authorities Must Take Action
The import data highlights two dangerous aspects for the world’s second-largest economy. First, it indicates a reduction in manufacturing capacity, with factories already struggling to sell products abroad – a problem that may worsen if the U.S. imposes higher tariffs. Second, it points to the weakness of Chinese consumers, who currently seem reluctant to spend.
It’s important to remember that a social contract exists in China: the public does not question the Communist Party’s leadership as long as they enjoy a general increase in prosperity. Therefore, political authorities are starting to implement and announce measures to stimulate the market and economy. But this isn’t, and won’t be, easy, so they are also playing other cards. Anti-monopoly actions against Nvidia have just begun, likely as a counter to U.S. policies. Tensions surrounding Taiwan are also escalating, with patriotic fervor being a typical move by authoritarian governments facing internal challenges. Whether these actions will produce the desired effects remains to be seen. What is certain is that a far more serious confrontation lies ahead once Donald Trump occupies the Oval Office.
Tuesday in Contrast to Monday
Tuesday’s trading largely reversed Monday’s trends, ultimately reflecting stagnation and indecision among investors. Did Shanghai’s stock market fall while Hong Kong’s rose yesterday? Today, it was the other way around. On Monday, the Paris index surged (buoyed by news of Chinese stimulus), but by Tuesday, it corrected by 0.8%. The Polish złoty had another strong session on Monday, strengthening due to market appetite for risk and a hawkish Monetary Policy Council (RPP). During Tuesday’s session, however, it partially lost ground.
This was partly due to the EUR/USD rate, which reversed from 1.059 and fell to 1.052 in the afternoon. The regional currency basket saw a collective retreat, with the Hungarian forint (HUF) holding up best. For the Polish złoty (PLN), this means the euro returned to above 4.26 zł and the dollar above 4.05 zł.
However, the decisive events of the week are still ahead. Tomorrow brings U.S. inflation data, followed by the European Central Bank’s (ECB) decision on Thursday, and a press conference with President Christine Lagarde.
Author: Adam Fuchs, Currency Analyst at Walutomat.pl
Source: CEO.com.pl
