Chinese Economic Data Due Out Overnight, Set Tone For Thursday Trading

Late Wednesday night, two key data points are set to be released from China which will shed light on the state of the manufacturing sector. At 9:00 pm, the official manufacturing PMI is due out and at 9:45 pm, the HSBC Manufacturing PMI is due out.

Critics have pointed to the fact that the two surveys have diverged over the past year or so. However, the way the surveys are conducted gives insight into this divergence of the two indexes. The HSBC survey has shown a larger slowdown than the official number in recent months, however this is due to the fact that the official PMI tracks only the largest companies in China while the HSBC survey tracks a larger number of companies who are generally of smaller size. Thus, it is not a question of whether to rely on either of the surveys but more of how to analyze them together.

With both indexes dropping below 50 in recent months, it is clear that the Chinese manufacturing sector is slowing. The official PMI is expected to show that the manufacturing sector returned to growth in October, as the index is expected to rise to 50.2 from 49.8. The data is still expected to be well below the cycle peak from April of 53.3 and below the post-crisis high of 56.6 seen in December of 2009. For reference, the high estimate is 51.8 and the low estimate is 49.8, meaning that no economists expect the rate of contraction to have increased.

In addition, the China HSBC Manufacturing PMI is due out. The survey is expected to show that the rate of contraction of China's manufacturing sector slowed in September but still contracted. Economists surveyed by Bloomberg expect a reading of 49.1, higher than September's 47.9 reading. The high estimate is 49.2 and the low is 48.1 with most estimates clustered between 49 and 49.2.

A strong reading from the data would create a risk-on environment globally, all else equal. Materials stocks would most likely rally, especially Freeport-McMoran Copper and Gold (FCX), which is rather positively correlated with the official PMI index, meaning that as China's manufacturing sector expands, Freeport performs better. Also, the Aussie dollar (FXA) is used as a proxy for investing in Chinese growth by currency traders and would most likely bounce on a strong number.

Luckily, there is no significant data set to be released out of Europe overnight, so investors should be able to trade based on the sentiment from China. The ISM Manufacturing Index and the Markit U.S. PMI will also helped in setting the tone for U.S. trading Thursday following initial jobless claims and setting up Friday's nonfarm payroll release from the Bureau of Labor Statistics.

By Matthew Kanterman