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Monday, September 9, 2013

Positive economic growth data out of China and Japan provide a favorable backdrop for today’s trading action as Congress returns to discuss the Syria issue. We don’t have much on the domestic economic calendar today and the rest of this week, with markets expected to remain tentative ahead of next week’s Fed meeting that will likely usher in the long-awaited Taper.

Stronger trade and less worrisome inflation data out of China will likely further raise hopes that the country’s growth has stabilized. China's trade surplus, the difference between exports and imports, rose to its highest level since January this year. This reflects strong demand for the country’s products, particularly in the U.S. On the negative side, the less than stellar growth in imports raise questions about the domestic demand backdrop. Also the continued momentum in exchange rate and rising wage growth for Chinese workers relative to other markets like Vietnam raise questions about the long-term sustainability of exports growth.

That said, China’s growth outlook appears a lot more reassuring than many of the other major emerging market economies that have to deal with a less helpful post-QE international financial backdrop. Countries like India, Brazil, Turkey and others are facing doubts about their ability to fund current account deficits, which is weakening their currencies and growth pictures. The fact that China doesn’t have to deal with this issue is a net positive for the global economy.  The outlook for Japan appears upbeat as well, not only did the country got the nod to host the 2020 Summer Olympics, but the Q2 GDP was materially revised higher on better than expected capital spending.

This improved Asian growth picture, coupled with signs of recovery in the Euro-zone and positive momentum in the U.S. economy, bodes well for the markets. Sustained economic growth along these lines should more than make up for higher interest rates in the post-QE world. We will likely get past the Taper issue next week, helping the markets focus on these improving fundamentals going forward.

Sheraz Mian
Director of Research

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