The politicians in Washington can breathe a collective sigh of relief. They reached a deal and no one will be blamed for keeping the shutdown in place; or restricting the country’s ability to pay its debts; or causing a collapse in the markets.
Well … not until January anyway.
Because that’s when we get to do this whole thing all over again. And without spinning my wheels with detailed political projections, I’ll say it’s going to be tougher for the markets next time our illustrious lawmakers take the stage.
Why? How about 1.35 billion reasons: China.
Come January we’ll be another three months into China’s inconvenient truth: the forced rebalancing of its economy. With the U.S. government issues postponed for now, and assuming the political situation in the euro zone doesn’t unravel first, the market will need to turn its attention somewhere.
I don’t follow earnings reports, but I don’t suspect there’s much upside potential for the markets even if third-quarter results are decent. There’s no cheerful story there.
Japan is still very much active in implementing its Abenomics. And while that has the potential to influence the value of the yen and Japanese markets, it’s relatively stagnant news for global markets.
China, however, has been flying under the radar for much of the year. It was actually a recipient of capital flows during the mid-year scare that pressured emerging markets. The economic data coming out of China has been good enough to keep from spooking investors. But the financial data, which gets less play, bodes ill for China’s efforts to sufficiently rebalance its economy.
Rather than reinvent the wheel, I’ll refer you to an Ambrose Evans Pritchard article in the Telegraph that mentions China’s worrisome budget deficit, money supply growth, inflows of foreign reserves, debt growth and its accompanying paltry economic efficiency. It’s a good article. But it barely touches on the fact that the most recent Chinese export data raises a huge question mark.
With flagging exports to the euro zone now joined by a drop in exports to emerging markets (particularly Southeast Asia) in September, can China’s economy rely on a return of exports? If not, then there will be increased pressure on already overheated investment and credit to compensate. This will probably rear its ugly head by January just in time for the new charades in Washington.
It’s not looking good for a Happy New Year.