Daily Market Reports | Oct 03 2011
By Greg Peel
Beijing announced on Saturday that China's manufacturing purchasing managers' index rose to 51.2 in September from 50.9 in August.
This is encouraging news if the numbers are accurate given China's PMI fell four months in a row to bottom out at 50.7 in July and has now apparently returned to increasing growth, albeit only slightly increasing. The same pattern occurred in 2010 suggesting a seasonal influence is at play as well as the demand/supply impact of a slowing global economy.
HSBC calculates its own measure for China's manufacturing PMI and its analysis arrived at a September reading of 49.9. This number is flat from August and above the 49.4 “flash” estimate HSBC provided earlier in the month. It is nevertheless a result showing the barest of ongoing contraction in China's manufacturing industry. HSBC explains the variation between Beijing's official calculation and its own by noting Beijing surveys only state-owned enterprises while HSBC extends its survey further to small and medium-sized enterprises.
The month of September was dominated by Europe, where Greek default risk forced officials and politicians into action and daily news from the Continent sucked the oxygen out of all other global market influences. The US credit rating downgrade seems now all but forgotten, Congressional wrangling took a back seat last month and the Fed's Operation Twist was not well-received from a Wall Street hoping for a more definitive buffer against European uncertainty. But as the month, and the quarter, came to a close on Friday night, it was clear the market is now looking beyond Europe and its problems alone and focusing more widely on the global follow-through.
The close of a quarter is usually a period dominated by “window dressing” as investment funds try to push up their return results. Thursday night's trade on Wall Street saw a strong opening but buyers had to battle to fight off some determined selling. On Friday night, however, Wall Street never made it into the green. The selling was steady all day, sending the Dow down 240 points or 2.2% and the S&P down 2.5% to 1131.
When it came to explaining the weakness, many commentators pointed to China.
Europe is China's biggest export customer. On Friday it was announced German retail sales fell 2.9% in the month of August. Sales had risen 4.0% in June, dropped back to only 0.3% growth in July, and economists had forecast a mere 0.1% fall in August. The 2.9% fall was thus somewhat of a wake-up call.
Germany is by far the eurozone's strongest economy. The weak eurozone nations are being forced into austerity in exchange for bail-out funds which also forces economic recession. German taxpayers are significant in footing the bill, and waning taxpayer confidence in the eurozone's future as well as anger at having to prop up recalcitrant neighbours is clearly taking its toll at the cash register. Falling German consumer demand translates into falling demand for Chinese exports, which in turn impacts on the growth of China's manufacturing sector. The US is China's second biggest customer, and there consumer confidence is also at its lows in the face of stubborn unemployment.
China is the global economy's great hope, given it is accepted the major developed economies will either again face recession or at the very least grow very slowly from here. In 2008 the world also hoped China would be immune from the GFC and be the saviour but this proved not to be the case. At least not until Beijing pumped in enormous amounts of fiscal stimulus drawn from its vast trade surplus. China's export markets collapsed in 2008 but that stimulus was directed at China's fledgling domestic economy, such that in 2011 many expect ongoing Chinese urbanisation and industrialisation will provide the economic growth offset to weakness in developed economies and weak export demand. This is the crucial factor, and in a sense the Great Unknown.
One would expect the fortunes of the Chinese domestic economy would be reflected in its domestic stock market, and notably Wall Street selling became more robust late last week after the Shanghai index breached its 2010 low to mark a 24% fall from its recent peak. The US benchmark S&P 500 has fallen 17% from its April peak and the September quarter marked a 14.3% fall. Global economists are also divided on the extent of leverage in China and the potential for non-performing loans given 2008 stimulus has given rise to rampant, credit-fuelled property speculation and a seemingly uncontrolled infrastructure boom. There is a split between those confident in the Chinese domestic economic machine, and those fearing a credit bust.
Concern over an uncertain Europe and a weak US following through into a weakened China has also impacted on commodity prices in the September quarter. The impact is further exacerbated by the return of the US dollar as the world's safe haven, given dollar-denominated commodity prices must mathematically fall if the dollar rises. Friday night's weak session on Wall Street saw the US dollar index jump 1.2% to 78.79. Base metals in London were again under pressure, falling 2-5% across the board. US traders also dumped on West Texas crude, sending it down US$3.39 or 4% to US$78.75/bbl after it broke through technical support at US$80. Brent crude fell US$1.19 or 1% to US$102.76/bbl.
Gold has lost its immediate safe haven status after its bubble-and-bust and is now trying to consolidate in its role of longer term safe haven. Gold rose US$8.90 on Friday to US$1624.80/oz. It is almost amusing that only a few weeks ago, some were talking of the Aussie dollar as a safe haven candidate. The commodity-driven, Chinese proxy currency was down 1.2% on Friday to US$0.9661.
Perhaps the most telling asset price movement in 2011 has been that of the US thirty-year bond. On a combination of European uncertainty, global recession fears, weak US mortgage demand reflecting high unemployment, and the Fed's Operation Twist, the thirty-year yield has fallen from a peak of 4.60% in February to 2.92%, following a 14 basis point fall on Friday night. That's a 37% return for safe haven investors.
The SPI Overnight was down 81 points or 2%.
What will October bring? It is telling that on Friday night the uncertainty indicator that is the VIX volatility index on the S&P 500 rose 10% to finish the quarter at 43 – a number reflecting heightened fear. The official tick-up in China's manufacturing PMI may provide some solace today but on the wider scale we still come back to Europe, where a definitive decision on the EFSF and proposed Eurotarp is critical to any return to global investor confidence. In the meantime, the US battles on with a partisan Congress determined to put political gain above all else.
Unemployment will return to focus in the US this week with the release of the ADP private sector jobs number on Wednesday and the official non-farm payrolls number on Friday. Prior to those releases, the manufacturing PMIs of Australia, the eurozone, UK and US will all be posted in the next 24 hours. Equivalent service PMIs will be released on Wednesday except for China's, which is due today.
The US will also see construction spending tonight, factory orders and vehicle sales on Tuesday, chain store sales on Thursday, and wholesale trade on Friday.
On Thursday the ECB will hold a scheduled monetary policy meeting. Within its mandate of controlling inflation, the ECB has twice raised its cash rate this year in the facing of growing sovereign debt uncertainty to the astonishment of many observers. As the crisis has now reached potentially the point of no return however, expectations are that the eurozone central bank will cut its cash rate on Thursday from the current 1.5%. A cut of 25 basis points is expected, with some talking 50 basis points.
A large cut in the ECB cash rate may provide some relief on the global economic front, but it would also force the euro lower. This in turn would drive the US dollar higher, and that would apply further downward pressure on commodity prices. If the situation in Europe is truly to be relieved, it must involve definitive decisions on Greek bond restructuring and European bank capital injections.
We can only wait and hope.
Australia sees its manufacturing PMI release today along with the TD Securities monthly inflation gauge. On Tuesday it's building approvals and the monthly trade balance, the latter being another indicator of Chinese demand. Wednesday sees retail sales and the services PMI, and Friday the construction PMI.
On Tuesday the RBA will hold a policy meeting and leave its cash rate on hold at 4.75%, citing ongoing uncertainty in Europe. The RBA will likely reiterate that it is ready to cut rates if it has to, but the global situation would have to take a perilous turn for that to happen. Australian economists are split down the middle as to whether the RBA's next rate move will be down or up, but the trend seems to have turned in favour of "down" recently.
It is Labour Day today in NSW, the ACT, South Australia and Tasmania. The ASX is open but trading is usually thin in such cases.
China's markets will be closed from today through Wednesday for public holidays.
Note that summer time began in NSW on the weekend, meaning from tomorrow the NYSE will close at 7am Sydney time instead of 6am as it has done all winter.
This fortnight's regular Thursday edition of FNArena's Market Insight live video presentation will be moved one week forward due to the Victorian Investment and Trading Expo at which Rudi will be presenting. Rudi will still appear on Sky Business's Lunch Money on Thursday.
For further global economic release dates and local company events please refer to the FNArena Calendar.
