UBS: China’s policy stimulus will prevent “hard landing

China’s onshore A-share market was shut for trading several times after triggering the 7% “circuit breaker.” The CSI 300 index, a collection of blue-chip stocks in Shanghai and Shenzhen, fell 7.2% in early trading on Thursday, having also been closed after heavy losses on Monday. Sliding stockspartly reflected concerns over the course of the Chinese currency, which the People’s Bank of China allowed to depreciate this week. In addition the gap between the onshore and offshore renminbiwidened to a record. CIO maintains its view that the onshore A-share market is likely to remain highly volatile in the short run amid concerns over Chinese policy and growth uncertainties. 

China’s December manufacturing purchasing managers’ index (PMI) signaled a fifth straight month of contraction. Resolving overcapacity will be a key government task this year as was laid out earlier in the Central Economic Work Conference. The official manufacturing PMI ticked up slightly to 49.7 (from 49.6 in November) thanks to a modest improvement in new orders and output sub-indices. But the employmentsub-index (which fell to 47.4 from 47.6) remained below the 50-threshold as disinflationary pressures continue to weigh on industrial sector profit margins and employment. CIO maintains its view that China’s policy stimulus will help prevent a “hard landing.” 

Final Eurozone PMI confirmed more robust real economic activity for the region. The last reading of the Eurozone composite PMI was raised to 54.3 from 54. But the output price sub-index remained below the expansion-signaling mark of 50. Taken in conjunction with Eurozone inflation data, which held steady at 0.2% in December, the figures reinforce the case for continued easy ECB policy to promote higher nominal growth and prices. Encouraging real activity and loans growth imply higher Eurozone equity earnings this year. CIO continues to hold a tactical overweight to Eurozone equities within our global tactical asset allocation (TAA).

Unemployment figures in Germany and Spain provided reason for cheer. In Europe’s largest economy the number of jobless fell by a higher-than-expected 14,000 in December. German unemployment is at a record-low 6.3%. This positive picture was mirrored in Spain, where unemployment declined by 55,800, alsobetter than forecast. Last year, Spanish joblessness registered its largest annual decline in its recorded history.

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