Daily Market Reports | Jul 02 2013
By Greg Peel
The Dow closed up 65 points or 0.4% while the S&P gained 0.5% to 1614 and the Nasdaq added 0.9%.
Yesterday’s 2% rout on the Australian market largely came down to the difference between 50.1 and 50.8, and 48.2 and 48.3. The market started the session to the downside on a weak lead from Wall Street and a 1.5 cent fall in the Aussie on Friday, which no doubt encouraged further offshore departures. But it was the Chinese data releases late in the morning that sealed Bridge Street’s fate on the day. By sector the selling was indiscriminate. It was a case of “Get out of Australia”, the China proxy.
Beijing’s official manufacturing PMI fell to 50.1 in June from 50.8 in May to mark a nine month low. The result shows Chinese manufacturing barely hanging on to expansion. But HSBC’s independent measure, which is weighted more to smaller private enterprises, fell to 48.2 from 49.2, deeper into contraction. The result of 48.2 was a tick below last week’s flash estimate of 48.3, which was already priced into the market.
Falling orders and rising inventories added pressure to Chinese manufacturing in June, said HSBC. A shortage of funds stemming from Beijing’s clamp-down on the short-term money market and the resultant credit squeeze made it difficult for smaller companies to borrow money. The PBoC’s orchestrated and naively conceived squeeze is all part of a package of reforms aimed at eradicating the corruption, manipulation and exploitation of Beijing’s monetary stimulus that has led to runaway speculative credit growth aimed at short term profit and not at the government’s plan of longer term sustainable economic growth.
The question now is how much pain Beijing is prepared to endure to achieve this necessary gain. President Xi Jinping told state media over the weekend that Chinese officials should not be judged solely on increasing economic output, suggesting Beijing is prepared to except a lower economic growth profile.
That’s not good news for Australia, given China has been the driving force behind the Australian economy for the past decade. The question now is whether the Australian domestic economy can pick up the slack left by the peak in mining capex and the shift into the resource sector’s production phase at a time China is not providing surging demand growth. It is a difficult road, but yesterday’s domestic data offered at least a glimmer of hope.
Australia’s manufacturing PMI leapt to 49.6 from 43.8 in May, its best reading in 16 months. The result still implies contraction, but at a much slower pace than a month ago. Are we starting to see the beneficial effects of a lower Aussie? There was also positive news on the housing front, with RP Data-Rismark’s average Australian house price measure showing a 3.8% rise for the financial year. What we need now is for house price strength to spill over into construction, given a shortage of dwellings. Otherwise rising prices benefit only the speculative investor.
Indeed, across the globe the PMI results were positive with the exception of China. For most of the post-GFC period this dichotomy has been the other way around. The eurozone’s PMI rose to 48.8 from 48.3 as the grinding claw-back continued, and the UK saw a rise to 52.5 from 51.5 to mark the fastest rate of expansion in two years. The US equivalent also returned to expansion at 50.9 having slipped to 49.0 in May.
The US result spurred Wall Street to a strong opening for the first session of the new quarter. The indices shot up from the opening bell as fund managers dived in to re-open their books and early on the Dow peaked up 174 points. The strength was not to last, and prices drifted off towards the close. Volumes will likely be low in New York this week given the Independence Day break on Thursday and the half-day session on Wednesday.
Wall Street is nevertheless more confident of its domestic economy, rising despite the dour news from China. Indeed, Australia was looking a bit lonely yesterday, despite having posted its own encouraging data, as the Chinese index rose 1%, Japan rose 1.3% (buoyed by a positive business sentiment survey), Germany was up 0.3%, London 1% and the US 0.5%. And it doesn’t end there.
Base metal prices surged on the LME last night. The US dollar index was lower, but only down 0.2% to 83.01. One LME market reporter suggested “today’s improvement in sentiment came after the Chinese numbers came in on target”, that is, in line with expectation. Makes us look like a jumpy bunch downunder.
Aluminium and copper jumped 3%, lead and nickel 2% and tin and zinc 1%. The oils were up on “positive data from the US, Japan and eurozone,” according to Dow Jones, with Brent rising US84c to US$103.00/bbl and West Texas up US$1.44 to US$98.00/bbl.
Gold also continued its rebound, rising US$18.20 to US$1253.50/oz. And having risen US$1.20 on Friday, yesterday spot iron ore was up another US40c to US$116.90/t.
The Aussie has rebounded a cent to US$0.9239.
In isolation, one would expect a cracker of a day on the local bourse today. What do the bleary-eyed futures traders think?
The SPI Overnight was up 4 points.
Australia’s capacity to overcome the China Syndrome will be on the minds of the RBA board members as they decide on monetary policy today. Having fallen from 103 to 96 by last month’s meeting, the Aussie has now fallen to 92, which is why few economists expect another rate cut today. The Fed has also outlined a supposed timetable for Fed tapering in the interim, and Australia’s own economic data are looking just a little brighter. It seems unlikely the RBA will fear a Chinese slowdown sufficiently to cut again, at least not this month. There are still expectations for an August move.
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