A short term reprieve from bad US, China data?

Bad news can sometimes be good news, especially when it comes to economic data and its impact on the stockmarket. 

Last week was a case in point. Economic data from the world’s two largest economies – US fourth quarter GDP and China’s February purchasing managers’ index (PMI) -- were disappointing, indicating that the global economic recovery may be hitting a speed bump. 

US fourth quarter gross domestic product (GDP) growth was revised downwards to 2.5% from 3.2% (refer to Chart 1) while China’s February PMI, a measure of manufacturing activity, dropped to a 5-month low of 50.2 (refer to Chart 2). 

 

While the data is bad for the two countries and the global economy, it actually is good news in the short term for the stock markets of emerging economies, Malaysia included. It means the tapering of quantitative easing (QE) could be delayed or slowed. That will in turn delay the rise in US interest rates and the outflow of foreign portfolio funds from this region.  

This will be positive for the local stockmarket and ringgit in the short-term, although it is unlikely to be sustained in the long term.  Over the longer term, a slower than expected recovery in the US will only delay, but not remove – the likelihood of QE tapering. However, if the US recovery stalls and China slows, there will be further negative repercussions on Malaysia’s economic prospects. 

The above forms part of The Edge weekly update on The State of the Nation. Read the full article in the upcoming Edge.