China, the first to recover from the first wave of COVID-19 infections, appears to be showing signs of a weakening economy, although the delta variant and floods that hit the country are supposed to be responsible for that.
China's retail sales rose 2.5 percent on an annualized basis in August 2021, slowing sharply from 8.5 percent growth in the previous month and missing market expectations of 11.5 percent. It was the weakest retail sales growth since August 2020, as consumption weakened in some regions during the COVID-19 outbreak. Sales of both jewelry and furniture grew at a slower pace in July. Sales of clothing, cosmetics or telecommunications services also declined. In addition, sales of household goods and automobiles showed negative dynamics. On the other hand, China's industrial production grew by 5.3 per cent year-on-year in August 2021, below market forecasts of a 5.8 per cent increase. This was the weakest growth in industrial production since July 2020.
Why might the above data be crucial for markets that don't seem to be reacting to it so far? Assuming that the Chinese economy is the first to recover from the crisis, followed only by the U.S. or European economies, China's problems may also arrive late in these places. This lag may be evident in the winter, where in turn high inflation in Europe due to the 2020 base effect may appear.
So a mix of weak economic data, possibly a cold winter that doesn't help the data either, and on top of that an inflation record - these could be potential risks that investors in the equity market, where the German Dax or the US S&P 500 are still relatively high, don't seem to be paying attention to at the moment.
Weekly chart of CFDs on DAX index. Source: Conotoxia cTrader
Meanwhile, gold, on the other hand, is relatively low for such inflation. Possible stagflation-related phenomena could help precious metals and potentially hurt stock indices in Europe or the US.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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