CHINA IS KEY TO A FURTHER RALLY IN RISK

AS global markets stabilised last week in the wake of better than expected US employment data, the bulls breathed a sigh of relief that the broad sell-off in risk assets may be finally over. Last week’s better than expected economic data may have quelled concerns that the world is headed for a double dip recession, but I believe that the sense of confidence is premature.

The global economy remains in a precarious position, with Europe mired in a serious credit crisis that continues to weigh on the region’s economy. Latest surveys of the Eurozone manufacturing and service sectors show that activity has already started to contract. Growth in the fourth quarter of this year may be anaemic at best.

This past weekend, German Chancellor Angela Merkel and French President Nicolas Sarkozy pledged that in three weeks they would devise a plan to recapitalise banks, get Greece on the right track and fix Europe’s economic governance. But most analysts believe that anything short of a unified European Treasury system will ultimately fail to resolve the problem.

Meanwhile, China has been on vacation for most of last week, which allowed investors to focus elsewhere. However, the world’s most populous nation will return to work this week. Investors will get a good glimpse of the economic conditions on the ground as the country releases a slew of economic reports including new loans, money supply, trade balance, foreign direct investment and inflation data.

As China takes centre stage again, it holds the key to the rally in global capital markets. If the data being released shows a benign combination of expanding trade balance surplus and easing inflationary pressures, then risk assets such as equities, commodities and commodity currencies should all continue their recovery rally.

The Australian dollar remains the most levered currency to Chinese economic demand and if the data prints better than expected, the Aussie could move back to parity on assumption that global growth is regaining momentum. But if Chinese data disappoints, suggesting that growth in Asia is starting to slow as well, the pair could quickly unwind towards RMB0.9500 as disappointment spreads through the market.