It’s a global economy, so it's little wonder that the ripple effects from China are leaving their mark in European macro data this morning. The large swings in equity indices lately are characteristic of a downtrend and one can expect this investor anxiety to continue as long as volatility imports itself from overnight Asian trade. With China’s Shanghai Composite closing lower by 1.3% and its main indices tumbling 5%, there seems to be little positivity in financial markets today.
Naturally, the moves made by the PBOC in respect of liquidity additions and stock market intervention will take a while to have an effect. Trade balance due for release on September 8th will likely make for interesting reading, however.
The prospect of the Fed meeting later in the month is also plaguing sentiment and the mixed messages and lack of clarity purported to be ‘forward guidance’ from various FOMC members has done nothing but stoke its own volatility. The probability of a hike has ricocheted back to 36% from around a 20% probability last week.
The only bright spot was the better than expected Euro-area jobless rate, which fell to 10.9%, the lowest since 2012.
Turnaround Tuesday is apparently history. European indices are now down by an average of 3%
The theme continued with weaker manufacturing output across the board (with the exception of Germany). Even Ireland, lauded as the powerhouse in this area, recently failed to bring much cheer with August’s output falling to 53.6 from the prior 56.7.
UK manufacturing output didn’t escape; coming in at 51.5 against the consensus for a 52.0 print. The level of new export growth decreased for its sixth consecutive month with export demand overseas hampered by a strong pound, weak Eurozone sales and of course the slowdown in China. Mining stocks have retaken their mantel as stocks you’d prefer not to own right now. Glencore (LONDON:GLEN) is likely the most pressured, falling another 5.26% this morning despite a rather apt ‘speculative buy’ recommendation from Cannaccord Genuity, which placed a 220p price target on the stock. News that Lansdowne Partners UK enlarged its short position on the company by 9% has exacerbated and Glencore is, by a long shot, trading at its biggest discount vis a vis its peers.
Other equity highlights:
Burberry (LONDON:BRBY) (-2.91%) Luxury demand in China has slowed following a clampdown on graft and the devaluation of the yuan. The company recently reported its weakest sales growth in 2 years.
Inmarsat (LONDON:ISA) (+2.04%): The company has confirmed the successful launch of its third Global Xpress satellite from the Baikonur Cosmodrome in Kazakhstan. The satellite entered orbit today.
RDSA (+0.24%). Shell (LONDON:RDSa) has resumed operations in the Arctic after halting for storm. Also raised to buy at Santandar. Average target price at 2208p
We are calling the Dow lower by 362 points.
Manufacturing PMI releases painted a grey macroeconomic picture in August.
The Chinese manufacturing activity has contracted to three year lows as predicted by the market, fueling doubts that China may miss its official 7% target. As the Chinese authorities boost measures to foster growth, the People’s Bank of China will require banks trading FX forwards for their clients to have 20% in US dollars. This is a decent warning that the depreciation in yuan is certainly not over; the impact on exports is yet to be seen.
In Japan, the capital spending unexpectedly slowed down to 5.6% y/y in the second quarter (vs. 8.8% exp. & 7.3% previously), perhaps an explanation for the 23.8% surge in company profits whereas their sales increased by a tiny 1.1%. As the bigger picture suggests that this is a one-time surge, the enthusiasm in Japanese stocks was rather on the short-side of the play. Nikkei stocks lost 3.84% in Tokyo as Topix wrote-off 3.83%. The market is gradually increasing expectation for additional monetary stimulus from the BoJ as the delay to power the growth engine and reach the inflation target will cause interruption on the fiscal front and bring doubts on Japan’s solvability back on the table, as the yen is expected to depreciate further.
The Reserve Bank of Australia maintained its OCR unchanged at 2% as expected. As the Australian dollar adjusts itself to soft commodity prices, it is just a matter of time before the RBA’s mid-term target of 0.70c versus the US dollar is reached. Interestingly, AUD/USD did not breach any key technical levels despite violent price action in the market, mostly due to China and commodity prices. AUD/USD has remains within its 8-week descending channel slowly but surely pushing the Aussie to RBA’s mid-term target of 70c. The pair is expected to remain in the multi-week channel, with buyers and sellers touted at the bottom and top of the 0.6973/0.7281 band.
Relief in Canadian dollar may be short-lived
The aggressive rebound in WTI prices has benefited to the Canadian dollar. As the WTI races toward $50 mark, the high price volatility is a sign that the move is not developing on a solid path. Despite lower US output and the possibility for OPEC to discuss with leading oil producers on ‘fair and reasonable prices’, the gap between the oil production and demand is expected to deepen. As the oversupply conditions in the oil market is expected to remain, if not deepen, the correction in oil prices will remain fairly insufficient to boost the oil industry in Canada.
The downside pressures in the oil market are an indication for an extended period of financial stress in the Canadian economic recovery. The second quarter GDP is expected to have contracted by 1% (annualised) in the second quarter. Further contraction is on the wire given the dynamics in the oil market and the lag in structural adjustments. The Canadian dollar is set for further depreciation toward 1.40 per dollar, as the deficit in current account is not seen stepping in positive territory anytime soon.