Asia is suffering a dose of China nerves today after this morning’s Manufacturing, and Non-Manufacturing PMIs disappointed. China’s Manufacturing PMI clung on to expansionary territory, slightly underperforming at 50.1. However, it was the Non-manufacturing PMI that surprised, tumbling from 53.3 to 47.5 for August, well into contractionary territory.
Several factors are at work here. Covid-19 lockdowns in various cities and critical ports sapped domestic consumption, and consumers postponed travel as a result. However, it is likely that the ongoing government clampdowns in multiple sectors, notably student tuition and technology, are impacting both employment concerns in those affected and broader consumer confidence as fears of wider interventions rise. The latter is a fair point, with China announcing more limits on online game time for children and investigating brokerage margin policies.
It seems that new restrictions/investigations/penalties across various economic sectors are happening daily now. I certainly can’t keep up with them. The cultural revolution-lite in China will, at best, limit the upside in China asset markets for now. By default, that will spill over to the rest of Asia. Manufacturing will also be a concern, and a RRR cut will likely occur sooner rather than later. We can probably expect more explicit stimulus from China if the past guides the future and possibly a weaker Yuan. That was likely to occur anyway as I believe the US Dollar will strengthen in Q4 once the Fed gets tapering. With Asian FX never far from the Yuan event horizon, it is reasonable to surmise the regional currencies, already looking wobbly on a medium-term basis, will suffer by association. When everyone has the same business model, in this case manufacturing consumer goods for the world, pain is jointly felt.
Elsewhere, the picture has been slightly rosier. South Korean Industrial Production rose 0.40% MoM in July, while Japan Industrial Production Mom Prel fell by 1.50%, less than expected. Looking into the South Korean data, electronics slumped as South Korea grapples with the same chip shortages and supply chain issues as the rest of the world. Not a case for panic yet, but worth monitoring in future data. Meanwhile, Singapore Bank Lending also expanded strongly in July, suggesting that the vaccinated City-state is well poised to emerge from its delta battle in good shape.
New Zealand Business Confidence slumped, unsurprisingly, but Australia posted a very healthy Q2 Current Account Surplus of AUD 20.50 billion. Private Sector Credit expanded by 0.70% MoM for July also. The current account is likely to bulge even more in Q3 as the state-wide lockdowns erode consumer demand while exports remain robust. Both the New Zealand and Australian Dollars have substantial upside potential in the shorter term if Covid-19 case numbers fall, as both countries appear to be weathering their outbreaks relatively well, at least on a headline basis.
The rest of the day’s calendar is heavy with second-tier data across Asia, and Europe, ahead of the US Chicago PMI and Case-Shiller Home Prices. The calendar has a lot of noise, but little substance, with the street, now target fixed on Friday’s US Non-Farm Payrolls. Eurozone Inflation is expected to rise to 2.70% YoY, following Germany’s high inflation print yesterday. Only a reading above 3.0% is likely to shake the transitory inflation pillars of the ECB. Asia will need to negotiate the China Manufacturing and regional PMIs tomorrow and Australian GDP. After the official data today, tomorrows China and regional PMIs will assume greater importance. Low readings will see another leg down in Asia stocks and possibly halt the Asia FX rally in its tracks.
China PMIs sink Asia equities
Overnight, US markets enjoyed a positive day notable for strong flows into technology stocks. The S&P 500 and Nasdaq closed at record highs as the S&P 500 rose 0.43% and the Nasdaq climbed by 0.90%. The Dow Jones appeared to be suffering some Hurricane Ida effects as it finished 0.16% lower. US after-market futures on all three are slightly higher in Asia, rising around 0.10%.
The story in Asia is very different, though. Regional markets were always likely to struggle after China announced limits on children’s online game time, with China tech stocks sure to have been in the firing line. But a barely expansionary China Manufacturing PMI and the surprise tumble by the Services PMI sealed the regions fate, and equity markets have mostly headed South.
After reasonable data releases, Japan and South Korea have recovered their post-China data losses, the Nikkei and Kospi rising 0.45% today. However, in China, the Shanghai Composite has fallen 0.75%, with the CSI 300 and Hang Seng tumbling by 1.45%. Singapore is 1.40% lower, with Taipei falling 0.65%, Jakarta by 0.25%, and Bangkok is flat. Malaysia is on holiday. Australia has taken its cues from New York, and post a solid current account release, the ASX 200 and All Ordinaries are 0.40% higher.
European equities are likely to look at China as a localised problem today and will likely push higher at today’s open. Similarly, I see nothing to stop the music playing in New York; that will have to wait for Friday’s payroll data.
Despite the endless optimism of the dip buyers, the dead cat bounce may be with us for some time to come in China. With a seemingly new intervention by the China government in a new sector each day, it is clear that regulatory risk is not going away anytime soon. If China’s economy is indeed slowing as well, the picture becomes darker once again, as it does for its more correlated regional neighbours. One bright spot is that a slowing economy in China will prompt stimulus measures from the central government, potentially limiting the fallout on equities.
Currency markets move sideways
Currency markets contented themselves with consolidating recent moves, with no data of note released overnight to shift expectations materially. The dollar index was unchanged overnight at 92.69 but has edged 0.15% lower to 92.55 in Asia. Today, the primary movers have been the Australian and New Zealand Dollars, which have dragged the Euro and Sterling higher, depressing the dollar index.
NZD/USD has risen 0.53% to 0.7035 today after Covid-19 cases fell for the third day in a row, raising hopes that the Kiwis have nipped the delta variant in the bud quickly, prompting reopening hops. NZD/USD looks to have triggered stops as it rose through 0.7010. That has lifted the AUD/USD 0.20% higher to 0.7310. NZD/USD has now unwound nearly all of its delta sell-off, which bottomed at 0.6800 last week. Should New Zealand have dodged another virus bullet, a rise by NZD>USD through 0.7100 could prompt further rallies to 0.7300, possibly quite quickly, as it will put the postponed RBNZ hikes back on the table.
USD/CNY has shown no reaction to the soft PMI data, being unchanged at 6.4660 today. Looking ahead, with another RRR cut on the horizon now and likely more stimulus domestically and to boost exports, a slightly weaker Yuan would be another piece of the puzzle. The Fed may do that job by starting to taper in Q4, and don’t think a taper-tantrum is off the menu. USD/CNY is unlikely to spend much time below 6.4000 for the foreseeable, with the risks now skewed to the upside.
Today, Asia FX is firmer against the US Dollar, with the Indonesian Rupiah up 0.40%, the Thai Baht up 0.50%, and the Korean Won 0.30% higher. I can see no particular reason for the rally other than the momentum of last week continuing in the absence of any new information to continue the narrative. Tomorrow’s regional PMI data could test that resolve.
Overall, I expect US Dollar weakness to continue this week, albeit at a slower pace, until the US employment data on Friday.
Oil prices edge higher on Ida
With the amount of actual damage to the US Gulf of Mexico production and refining infrastructure still unclear, oil prices edged higher overnight on supply concerns. Brent crude rose 1.10% to $73.35, with WTI climbing 0.70% to 69.10 a barrel.
Prices have eased in Asia after soft China PMI data and news that the critical US Colonial oil pipeline will partially reopen post-Ida. Brent crude has slipped 0.40% to $73.05, and WTI has retreated by 0.35% to $68.65 a barrel.
Attention will now turn to the OPEC+ meeting tomorrow, which will almost certainly keep its output policy unchanged and add another 400,000 barrels per day to production. Brent crude between $70.00 and $75.00 a barrel seems to be the grouping’s sweet spot, and with the futures curve in backwardation, demand remains robust despite the short-term noise. Last week’s V-shaped recovery in prices will also give OPEC+ confidence that markets can absorb the extra supply.
While we await more visibility from OPEC+ and IDA, I expect Brent crude to remain in a $72.00 to $74.00 a barrel range. Similarly, $68.00 to $70.00 a barrel should contain WTI.
Gold consolidates on technical support
With currency and bond markets having a quiet overnight session, gold saw some profit-taking on long positions. Gold edged 0.40% lower to $1810.50 an ounce in a nondescript session. Today, a weaker US Dollar in Asia has seen the yellow metal add 0.25% as it climbs to $1815.00 an ounce.
Gold’s rally seems to have run out of momentum for now, but that said, it is not showing any meaningful signs of fatigue here either. Gold has nearby support in the shape of the 100 and 200-day moving averages (DMAs) at $1809.70 and $1813.20 an ounce. As long as gold holds above this zone on a closing basis, it will continue consolidating gains.
Only a fall through $1780.00 an ounce will call the rally’s longevity into question while it faces formidable resistance between $1830.00 to $1835.00 an ounce. Like currency markets, gold looks to be waiting for Friday’s US employment data to determine its next directional move.
