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Daily Agenda: China Bulls Bet on PBOC to Take Action

Protestors in Brazil call for Rousseff step down; Puerto Rico negotiates with creditors before deadline; AIIB says ‘no’ to Taiwan.

Chinese export data for March, released this morning by the country’s National Bureau of Statistics, registered a 15 percent year-over-year contraction. Weak commodity prices drove import levels to nearly as steep a decline driving the trade surplus to a $3 billion, versus a prior $60 billion. The unwelcome news reflects a combination of factors including a strong yuan and softer demand from critical trading partners, including particularly slack shipment levels to Europe and Japan. The World Bank’s biannual growth projections for East Asia, issued today, were reduced to 6.7 percent for 2015 and 2016, primarily because of expectations for slower GDP expansion in China. With the Shanghai Stock Exchange Composite index now up nearly 30 percent year-to-date, it appears clear than many investors have concluded that the People’s Bank of China will take further accommodative action in the near future to combat softening activity measures.

Protests in Brazil. Marchers in more than 100 towns and cities over the weekend called for the ouster of Brazilian president Dilma Rousseff as sluggish economic conditions add to resentment brewing over the ongoing Petrobras corruption investigation. Despite polls showing that as much as 75 percent of the population is opposed to the current administration, no opposition parties have made no serious attempt to pursue impeachment yet.

Japanese machinery orders decline. Core machinery orders fell by 0.4 percent in February, according to data released today by the country’s Cabinet Office, with the headline index still significantly higher on a year-over-year basis. This volatile indicator, regarded as a harbinger of capital investment among Japanese manufacturers, was stronger than forecast despite weak demand data.

Prepa deadline looms. Negotiations carried over through the weekend between the Puerto Rico Electric Power Authority, known as Prepa, and creditors in advance of a Wednesday deadline for some maturing credit lines. With more than $70 billion in combined debts, the Commonwealth of Puerto Rico continues to struggle without access to restructuring or federal intervention because of its U.S. territorial status. Current yields on ten-year debt issued by the territory exceed 9 percent, compared to Treasuries, which are below 2 percent.

Taiwan not welcomed by AIIB. A spokesperson for Taiwan Affairs Office of the State Council of the People’s Republic of China confirmed today that the island will not become a founding member of the Asian Infrastructure Investment Bank, contrary to earlier media speculation that a tentative agreement had been reached. The sticking point remains the name to be used for participation. China has worked actively to prevent Taiwan from being recognized by the United Nations and other international bodies as it continues to consider the island to be a state of the People’s Republic.

Negative rates likely to stay in place in Sweden. In a German media interview over the weekend, Stefan Ingves, governor of the Riksbank, Sweden’s central bank, discussed the use of negative rates to combat the immense pressure put on the Swedish krona by the European Central Bank’s easing program. Sweden’s central bank has its benchmark repo level at –0.25 percent. Ingves sees little threat of inflation resulting from the current policy measures and left the door open for further rate cuts, despite harboring some concerns over real estate valuations in his nation.

Jiang trial gets underway in Shanghai. The trial of Jiang Jiemin, former chair of China National Petroleum Corp. and head of the Chinese government agency managing state-owned assets, commenced today in Shanghai. The state’s charges against Jiang include accepting and soliciting bribes as well as other abuses of power. The charges against Jiang were announced nearly two years ago. He has been imprisoned awaiting trial since that time.

Portfolio Perspective: Hong Kong Equities Remain AttractiveAdam Grimes, Waverly Advisors

Policy changes in China were anticipated to lead to more stability in China stocks, as outside investors are hoped to hold stocks longer than the typical hit-and-run trading style that drives volatile swings in exchanges there. The reverse seems to have happened, as volatility bled over to Hong Kong.

Regardless of the reason, we now see a strongly constructive environment in Hong Kong for tactical allocators. From a timing perspective, we would wait for a pullback or pause, as any positions entered here are vulnerable to mean reversion. Another alternative would be to add partial exposure here and consider adding more on weakness. We see potential for at least three quarters for strong performance in Hong Kong.

Adam Grimes is the managing partner and CIO of Pittsford, New York–based research and asset management firm Waverly Advisors.

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