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Chinese authorities declare victory on stimulus package

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Global equities are flat on the week but Chinese stocks are down some 5% after officials said on Monday the success of their stimulus package meant they could take their foot off the throttle.

Whilst down on the week, Chinese stocks have done exceptionally well this year, up 30% including the poor week they have just had. Much of this rally has been driven by the fiscal and monetary easing we have seen this year, so it is unsurprising some of these gains have been given up on the news that the government is paring back its stimulus. However, analysis from Goldman Sachs suggests that the stimulus package has been successful – their CAI suggests GDP growth in March is running above 7%, up from a low of 5% last December.

There has been little news on either Brexit or the US/China trade deal this week although it is noteworthy that President Xi committed to keeping the Yuan stable something the US wants it to do. Aside from this, market commentators have begun to discuss two things: the US Dollar, and inflation. There appears to be a disconnection between what investors think should happen and what is actually happening on both these fronts.

Inflation – Many investors believe more dovish central banks combined with improving wage growth (especially in the US), higher oil prices and decent economic growth suggests that we should see rising inflation. However, this is not the case and core inflation has stalled or is falling in developed countries.

The Dollar – Many investors think a more dovish Federal Reserve, combined with a President who has expressed his desire for a weaker dollar should help the Dollar drift lower this year. However, this hasn’t happened. In April alone, the dollar has strengthened 1% against its peers.

It has been a mixed couple of weeks for Big Tech – The EU voted into law the Copyright Directive, which seeks to shift power from platforms like YouTube and Facebook to content creators (ie people). Perhaps more ominously, Nancy Pelosi, the speaker in the US House of Representatives, suggested now may be the time to remove a key piece of legislation, which tech companies like Facebook, Google and Twitter have used to avoid regulating content on their platforms and has allowed them to thrive.

However, results for Q1 2019 have been strong. Microsoft and Amazon’s cloud based divisions helped deliver stellar revenues for both companies in the first quarter. Facebook’s ad revenue rose 26% year-on-year, ahead of expectations whilst Netflix reported better than expected user growth and better margins. On top of this, Pinterest and Zoom shares have rallied over 50% and 80% respectively, since their IPOs last week. So, whilst the regulatory and political landscape may be changing, this is not yet showing up in Big Tech’s earnings reports and seemingly hasn’t dented investor enthusiasm.