Challenging Monday

Investors are having a tough time of things today.  There are three issues that have eclipsed the firming of expectations for  a mid-year Fed hike.  Greece’s Tsipras remained committed to his campaign promises in a speech to parliament which keeps in on loggerheads with the Europe.  

The confrontation with Russia over Ukraine is at crossroads.  If a deal is not worked out later the week, the may be serious escalation as some in the US, over European objections, send weapons to Ukraine.   Both these issues will likely be discussed today when Obama and Merkel meet.  A press conference is expected a little before midday on the East Coast. 

The third issue is China’s trade balance.  The surplus ballooned to $60 bln, a 20% surge from December.  However, the critical point is that this surge was a function of a decline in both imports and exports.  Imports slumped by almost 1/5 on a year-over-year basis (-19.9%).  The key driver here is the sharp decline in commodity prices, especially oil, iron order and coal.  Domestic demand may have also softened leading to some volume reductions on top of the value decline. 

Exports fell 3.2% year-over-year.  This is partly a function of weak foreign demand.  Some may see the nearly 11% decline in exports to Hong Kong as a result of the official crack down on fraudulent activity.  The 42% decline in exports to Russia is notable.   Could there be a currency component here?  The Australian dollar gapped lower in Asia partly in response to the Chinese import news.  However, is recovered in the European morning. 

In some ways, China’s trade figures reflect a positive terms of trade shock.  Japan is also benefiting from the drop in commodity prices.  It reported its sixth consecutive monthly current account surplus.  The surplus of JPY187.2 bln was about half of the consensus, but on a seasonally adjusted basis is was better than expected.  The trade balance component was still in deficit, but at JPY395.6 bln, it was about 20% smaller than expected.  Japan’s exports rose 19% year-over-year, while imports were up 6.7%.