Bank of China Plans to Cut Lending, Threatening Risk Appetite (Euro Open)

China’s third-largest bank by assets plans to reduce lending in the second half of the year, threatening risk appetite across financial markets that have seen the East Asian giant as the poster-child of global economic recovery. A revision of second-quarter UK GDP and Euro Zone consumer confidence are on tap ahead.

Key Overnight Developments

• UK Consumer Confidence Held Flat for Third Month in August, Says GfK
• Japan’s Jobless Rate Highest in 33 Years, Spending and Inflation Plummet
• Bank of China Plans to Reduce Credit Access in the Second Half of 2009

Critical Levels

The Euro drifted modestly higher in the overnight session, adding 0.3% against the US Dollar. The British Pound followed suit, rising to test as high as 1.63 to the greenback.

Asia Session Highlights

Japan’s labor market continued to disappoint in July as the Jobless Rate rose to a greater-than-expected 5.7%, a 33-year record high, while the ratio of available jobs to seeking applicants unexpectedly dropped to a fresh all-time low of 0.42. Looking ahead, a survey of economists conducted by Bloomberg suggests the pace of job losses will continue to accelerate at least through the second half of next year. This points to continued weakness in consumer spending as layoffs weigh on disposable incomes. Indeed, Household Spending fell -2.0% in the year to July, four times worse than forecast.

The economic outlook for the world’s second-largest economy was made all the more ominous as the Consumer Price Index fell -2.2% in the year to July, marking the sixth consecutive month in negative territory and threatening to send Japan spiraling back into another “lost decade” of deflation-fueled stagnation as consumers and businesses expecting lower prices in the future delay spending and investment, encouraged to perpetually wait for the best possible bargain.

In the UK, GfK Consumer Confidence disappointed in August, holding flat at -25 to show that pessimists among those polled for the survey outnumbered the optimists by the same margin for a third consecutive month, upsetting expectations of an improvement to -24. Expectations of economic conditions for the next 12 months and the propensity to commit to major purchases both deteriorated; the former for the first time since April. On the other hand, a gauge of saving intentions rose for the seventh consecutive month. A statement accompanying the release noted that, “While UK consumers are still cautious about the economy, they are less pessimistic than this time last year.”

The Bank of China Ltd, the country’s third-largest lender by assets, said it plans to slow credit growth in the second half of the year. The news reinforces the government’s efforts to rein in lending and may weigh on risky assets considering the market’s recent focus on China as the poster-child of recovery from the global downturn.

Euro Session: What to Expect

A revision of the second-quarter UK Gross Domestic Product is set to confirm that the economy shrank 0.8% in the three months to June to bring the annual growth rate to -5.6%, the worst in at least 53 years. Barring an unexpected, large revision in the headline figure or any of the key components (in particular the Private Consumption reading), the outcome is unlikely to produce much of a reaction in the currency markets having already been priced into the exchange rate. Indeed, the market seems focused more on the Bank of England’s dovish posture despite surface-level improvements in economic data: a trade-weighted index of the Pound’s average value topped out on 08/05, the day before the last rate decision, and has been trending lower ever since; a Credit Suisse index gauging traders’ 1-year BOE rate hike expectations (as derived from overnight index swaps) topped out on the very same day.

Turning to the continent, Euro Zone Consumer Confidence is expected to rise for the fifth straight month to print at -21 in August, up from -23 in the previous month. The metric closely tracks a Morgan Stanley index of Euro Zone stock performance; indeed, the correlation now stands at a formidable 97.7% and has registered above 80% since October 2005. Equities listed on Euro Zone exchanges have added 5.7% so far this month, bolstering the case for an improvement in sentiment. The Euro Zone Business Climate Indicator is likely to follow a similar trajectory: this metric is 95.1% correlated to stock performance in the currency bloc. While these results will offer little by way of new insights, they may offer some additional near-term fuel to continue feeding the rebound in risky assets that began late into the New York trading session. The longer-term outlook is far more ominous, however: unemployment stands at 9.4%, the highest in a decade, while loans to Euro Zone businesses and households grew just 0.6% in July, the lowest since records began in 1991. Clearly, private demand can’t grow without the ability to earn or borrow money, making any rebound beyond the fleeting effects of government stimulus a distant prospect.

Written by Ilya Spivak, Currency Analyst
Article Source – Bank of China Plans to Cut Lending, Threatening Risk Appetite (Euro Open)