China outlook
Our view. Still more weakness in the short term but moderate recovery from Q2 19.
Leading indicators paint a mixed picture
#1: Home sales to see lift from lower yields.
#2: Commodity prices generally weak.
#3: Credit impulse weak but ray of light.
#4: Export model points to overshooting in exports.
Policy outlook
We look for US-China deal in next 3-6 months to remove a key headwind.
We also expect further stimulus coming soon (big tax cut to both consumers and companies and one or more reductions in the reserve requirement ratio.)
Chinese market outlook
We expect USD/CNY to stay around the current levels (6.85) in the short term. A weaker USD is keeping a lid on USD/CNY despite the Chinese slowdown. A halt to CNY weakening is also likely to be part of a US-China trade deal.
More downside risk to stocks short term but higher from Q2 on stimulus and recovery.
Global financial implications
Equities . Short term still high volatility from weaker cycle. Outlook to improve when China recovers from Q2.
EM. More headwind short term but turning to tailwind from Q2.
Global bonds. A weaker China cycle short term = disinflationary pressures and downward pressure on bond yields - all else being equal.
Commodities. Metals to be underpinned by Chinese stimulus, which benefits construction and infrastructure. Oil price sell-off overdone.
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