Try as one may, it's challenging to look through the makeup of China's economic recovery which offers a roadmap to the rest of the world – and it’s not especially bullish for one that’s wholeheartedly predicated on consumer-driven recovery; forget about a V, this is going to be a lengthy S-L-O-G shaped recovery.
The challenge of growing the economy this year while rebalancing from investment to private consumption could prove difficult.
History suggests that China will revert to debt-driven investment if it needs to delay economic rebalancing for the second time since the global financial crisis.
For local currency markets, the USD-CNH downside remains intact. Still, it will likely drip lower as mainland regulators appear more likely to tap the brakes when domestic equity sentiment starts to froth too much.
While the positive Q2 GDP print should continue to support exporters of commodities into China (AUD, IDR) where exporters of consumer good could lag ( EUR, KRW, TWD).
China's retail sales numbers indicate consumers remain extremely guarded and are probably still fearing a second wave outbreak. Maybe the second wave Covid-19 headline deluge from the US market is having a decidedly negative effect on Chinese consumer behavior, which could be extrapolated globally using China as a blueprint.
Indeed, the slower than expected China consumer-driven rally whispers of downside risk to the US markets. Real yields remain lower, suggesting this is a market far from optimistic about a medium-term recovery, despite better-than-expected high-frequency data where US retail sales for June surprised to the upside.
Finally, a positive outcome from the EU summit would incorporate no reduction in the EUR750 bn recovery fund size. Steps towards an agreement on conditionality and debt mutualization could even be firmed up at a meeting later in the summer.
So long as they keep that significant number on the table, risk markets should be content – even if the ultimate prize of debt mutualization gets delayed to later in the summer.
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