China PMI miss fails to derail Asia

Despite disappointing Chinese data, Asian stocks seemed to put concerns of a China crash behind them as they rallied strongly through the session.

Shanghai
Source: Bloomberg

There were some major moves in the currencies as well with a strong risk-on move driving buying in the Aussie and the Kiwi. The US dollar was clearly giving some gains back which helped many Asian currencies pairs. This also spilled across into materials indices which saw some brief respite from the weaker US dollar.

China PMIs

Fears that China’s monetary easing and fiscal spending have not done enough to prop up the economy have only increased in the wake of today’s PMI release. China’s manufacturing PMIs both stayed heavily in contractionary territory despite the NBS PMI declining and the Caixin PMI increasing. It does seem quite noteworthy that the NBS PMI, associated with bigger state-owned corporates, dropped to its lowest level since August 2012. There was little to cheer from the breakdown in its components either. In the two key sub-components, Output slowed from the previous month and New Orders returned to contractionary sub-50 territory.

Despite staying firmly below 50, the Caixin PMI (associated more with small and medium private sector companies) did improve to its strongest reading since April. Output in the index also clawed its way back to 50 from 48.1 the previous month. However, New Orders declined further from the previous month. On the bright side, the NBS non-manufacturing PMI bounced back to 53.6 from 53.1 the previous month, with hope for China’s future growth continuing to rest on the services sector and consumption growth.

Japan

Japanese capital expenditure (capex) numbers came in far better than expected and cast doubt on whether it genuinely entered a technical recession in Q3. Capex grew at its fastest year-on-year (YoY) rate since Q1 2007 at 11.2%, far higher than expectations for a 2.2% expansion. This indicates that the second estimate for the investment component of Japan’s Q3 GDP is likely to be revised upwards and possibly reversing the quarter-on-quarter decline seen in Q3 GDP. This further buttresses the Bank of Japan’s (BoJ) reluctance to expand their quantitative easing.

No doubt this helped fuel the rally in the Nikkei, which saw utilities gain over 3%, followed by IT and the materials sectors.

Australia

The Australian data today continues to show that despite the end of the commodities boom and the slowdown in housing, other elements of the economy are steadily picking up the slack. There was a brief pause in the rise of the Aussie dollar and the ASX after the Chinese NBS PMI declined, but after a wave of selling failed to come through, both of them continued to surge.

RP house price data declined 1.5% month-on-month (MoM), its first monthly decline since May. Building approvals growth eased to 12.3% YoY in October from 21.4% the previous month. These are likely to slow further over the coming months given auction clearance rates dropped to 60.1% nationally over the weekend having seen a consistent and steady decline since early June. The ANZ Roy Morgan weekly consumer confidence also dropped to 112.8 as concerns over the Paris Attacks likely affected consumer sentiment.

The most significant news was that net exports are now expected to contribute 1.5% to GDP far more than the 1.2% expected. This now adds some upside potential to tomorrow’s expected 0.7% quarter-on-quarter (QoQ) GDP expansion. The AIG manufacturing PMI which expanded at its fastest rate since October 2013 and its five-month consecutive expansion is the longest seen since 2010.

A lot of the recent data we have seen is painting the Australian economy in a far better picture than many had expected. The market capitalisations of the materials and energy sectors have been savaged over the past year and a half, meaning they no longer have the same bearing on the ASX as they used to. The interesting fact is this may increasingly be true for the Aussie dollar and the Aussie economy, as they have both been more resilient to the further swoons in the iron ore price seen over the past month or so than many would have expected.

Certainly, this robustness seen in elements of Australia’s domestic economy and the general decline in equity market volatility does re-emphasise the impressive yield offering in Aussie stocks for foreign investors. The strong rally in the ASX today has been dominated by the high-yielding large caps with the Big Four bank and Telstra supporting this line of thinking.

ASX

The Reserve Bank of Australia (RBA) left rates unchanged at 2% as expected today. While emphasising that growth continues to remain below trend they did note that economic conditions have firmed a little over recent months. In particular, they point to the increased credit growth seen in recent months and evident in yesterday’s aggregate financing data. They believe that it was appropriate to leave rates on hold, and the market pricing for a cut in February dropped to 21.7% and to 30% for March.

Yield-hunters saw the big banks and Telstra all seeing strong buying today. Financials as a whole gained 1.8%, with ANZ seeing the strongest gains of the Big Four.

A fine display of bottom picking helped drive up the consumer sectors. Dick Smith bounced back 25% today after losing more than 50% the previous day on their FY16 earnings warning. Metcash also saw strong gains as its recent earnings update seemed to show that the worst was over and that hopefully it was only up from here. Both consumer discretionary and staples gained more than 2%.

The materials sector also saw strong buying with heavily hit BHP gaining 3% but still staying firmly in the A$18 handle. The sector as whole rose 2%.

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