Soft or hard landing. This debate has be going on for some time, and for economists who thought a China hard landing is an impossible case scenario should reconsider their outlook.
The revised figure of China’s manufacturing purchasing managers’ index came at 47.3 in August, slightly better than a preliminary reading of 47.1 that caused a huge part of recent markets turmoil the past two weeks, but still the lowest reading in 6-1/2 years and the 6th consecutive month of contraction.
What is more worrying is the service sector, which has been one of the bright spots in the Chinese economy is now showing signs of cooling. The official reading dropped slightly to 53.4 from 53.9, but the final private survey shows further weakness dropping to 51.5, its lowest level in more than a year.
Chinese authorities are using all their tools to stop the market from falling further and reach their 7% growth target for 2015, by reducing interest rates, cutting the required reserve ratio, devaluing the currency, and pumping liquidity into the markets, but effectiveness of these policies has been put into question as no positive response seen so far.
European equity traders are monitoring Chinese data very closely and any disappointment is pushing the sell buttons. All Europe’s indices plunged at the opening session, with the Dax leading the losers for the major markets hovering around 10,000 benchmark which was defended last week. A close below 10,000 psychological level could spark renewed selling pressure and again put the German index in a bear market territory.
Oil Rally Gone too Far
WTI the U.S. crude managed to rally more than 27% in three trading days, the biggest gains in 25 years. The rally started with traders covering their short positions by end of last week, and again supported on Monday as OPEC said they are willing to talk to other producers to achieve reasonable oil prices as if the cartel surrendered to the shale oil industry. However, we still do not know how serious is OPEC, and are we going to see a response from the other producers, how about Iran’s oil which soon is going to hit the market. That is why oil rally seemed to be exaggerated, and we look for more downside in the short term.
Risk Aversion Supporting the Yen
Currency traders are heading towards the safe havens, with Yen leading the gainers in G10 currencies. USDJPY trading below 120 meanwhile the Euro again above 1.13, which is not good news for Bank of Japan, neither for European Central Bank. The inverse correlation between these two currencies and equity markets is becoming so tight, and the direct correlation between the Euro and Yen is becoming tighter than ever. Doubts over whether the Federal Reserve will raise rates in September continues to pressure the U.S. currency although the door is still opened for a hike. Further drop in the U.S. currency could be a midterm opportunity to buy the dips, as divergence in monetary policies will continue to support the dollars even though the Fed might not pull the trigger in September.