China Manufacturing
Everyone knows that the finest shoes and suits are fashioned and crafted in the UK, the fastest and most gorgeous cars machined and tooled in Italy and the finest cuisine honed and perfected in France. It is with the same amount of certainty that we can say that only the worst economic data is being coughed out of China at the moment.
The preliminary, or ‘flash’, estimate of manufacturing PMI for the Chinese economy fell to its lowest level in six years in September, missing estimates and hammering home the feeling that any supposed benefit that was due to the Chinese economy from the devaluation of the yuan six weeks ago has yet to be seen.
There was not a single bright spot in the release, with output, new orders, exports and employment all falling at an increasing rate.
Strong Risk-Off Reaction
The reaction in markets has been swift and resounding. Traders got shot of stocks and other risky assets, buying the USD, JPY and EUR and selling out of emerging and commodity currencies. We know that Fed policymakers spoke to concerns of “global economic and financial developments”, which they believe “may restrain economic activity somewhat” last week.
Indeed, “financial developments” are alive and kicking in markets with emerging market currencies coming under renewed scrutiny in the days following the Fed’s decision to hold. The Brazilian real has hit record lows against the dollar and losses throughout the Asian currency space haven’t been helped by equity and bond market instabilities. The Malaysian ringgit is at fresh 17-year lows this morning as well.
Time Is The Enemy
These instabilities can be overcome by many things but front and centre in investors’ minds are strong economic data or increased monetary stimulus from the world’s central banks. For now, however, neither seem to be coming; economic data is nowhere near reliable enough and central banks are uneasily sat on their hands not wanting to pre-empt the Federal Reserve. Time is what we will get but that is not what EM currencies need or want. Indeed, many EM central bankers have asked for the Federal Reserve to get on with it and eliminate the uncertainty.
Draghi To Hit Back?
Focus is on Europe today despite the poor news out of China, with similar flash PMIs from the European economy due before Draghi’s quarterly testimony in front of the European Parliament. A lot can be said for the European Central Bank’s handling of the recent economic slips in the Eurozone, and the imposition of zero interest rate policy and asset purchases seems to have helped by recent competitive devaluation has upped the ante. Let’s see if Draghi pushes back today in front of lawmakers. I like the euro to remain weak despite its recent haven status.