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Poor Chinese trade figures on Wednesday provided fresh reasons to worry about prospects for the global economy and corporate earnings. Both imports and exports fell in June, pointing to a further weakening in China’s growth story.
But there is no need to despair. Bad news is good news – at least in financial markets, where investors’ main concern is what will influence the central banks’ bond buying, under their programmes of quantitative easing.
The past two months have seen a striking change in how equity markets assess incoming economic data.
Signs of weakness raise the prospect of central bank support being maintained for longer – underpinning share prices and depressing bond yields. Good news – such as last week’s US labour market figures – bring the opposite reaction: better than expected payroll data led to US Treasury yields soaring on worries that a “tapering” of quantitative easing was drawing nearer.
A similar pattern can be seen on a global level.
Citigroup’s G10 “economic surprise” index, which gauges economic data against expectations, moved sharply from negative into positive territory between the end of April and early July. Over the same period, the FTSE All-World share index switched from an upward to a downward trend, falling more than 3 per cent. Since then, the reverse has happened: Citi’s surprise index has fallen and shares have risen.
Strikingly, “bad news is good news” holds true in Europe – with the surprise index for the continent moving in the opposite direction to share prices – even though the European Central Bank and Bank of England made clear last week that they were far from unwinding exceptionally loose monetary policies: the Fed’s influence is omnipresent.
China’s weak trade data, meanwhile, were shrugged off in Asian trading on Wednesday – amid optimism that they would yet spur Beijing into policy action to support growth.
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