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The US dollar continued to rally through the Asian session as expectations for the European Central Bank (ECB) to further ease monetary at their meeting today prompted increased US dollar buying.
It was a weak bunch of services PMIs out of Asia today With Australia, China and Japan all seeing their services PMIs weaken.
Japan’s fall in the services PMI seemed to spur a further selloff in the index after an already weak start. The drop in services activity seemed to affect consumer-related stocks. The consumer discretionary sector led the declines in the index, with particularly big drops seen by Pioneer and Uniqlo-owner Fast Retailing.
China’s Caixin Services PMI also fell back in November to 51.2. Given the weak manufacturing PMIs out of China this week, it is clear how important the services sector is to China’s transitional growth. While the Caixin services PMI has managed to stay in positive territory, considering it is the only bright spot in China’s slowing economy, one would prefer to see it staying consistently above 52. Nonetheless, despite the general sell off seen in Asian markets, Chinese mainland bourses opened in positive territory. However, the H-shares did not seem to share their optimism staying firmly in the red.
After yesterday’s strong net exports contributing to Q3 GDP, the big fall back in Australia’s October trade balance has reignited concerns over how feasible it will be to repeat such a feat in Q4. The trade deficit declined further to A$3.3 billion its lowest level since April, and apart from that date it was the lowest reading since April 2008.
The biggest drag was the 5.8% month-on-month (MoM) decline in iron ore. This also saw a corresponding decline in exports to China, which fell 1% MoM. Certainly, China’s demand for iron ore is slowing along with its economy, but it’s uncertain how much of the drop off in October exports was due to the week-long national holiday in China at the start of October.
It should be noted that the significant drop in the Aussie dollar over the past year does make October’s trade performance look slightly worse in historical terms than it would otherwise. In US dollar terms the poor trade balance numbers in October and April are the worst seen since November 2012.
Exports declined 1.3% year-on-year (YoY), but imports saw their strongest month since April 2014 as they grew 6.5% YoY. Despite the disappointing trade figures, the strong and consistent growth in imports is further evidence of an improving domestic economic situation with consumer and business demand steadily rising albeit from a low base.
Also of concern was the second month of decline seen in the AIG Services PMI as it dropped to 48.2. While the weak Australian dollar has reportedly assisted the tourism sectors, the recent mortgage rate hikes have affected consumption in retail and hospitality. It was a very weak report with the majority of the sub-components contracting, particularly New Orders dropping to 47.3. It will have to be seen if this weakness begins to be borne out in other data. The 3% MoM decline in HIA new home sales today certainly heightens concern over what a slowing housing market will do to the Aussie consumer.
The 0.2% jump in the DXY dollar index overnight hurt commodities prices. The materials sector in turn lost 1.5% with a poor performance by the two big miners RIO and BHP, weighing down the sector as a whole. Gold dropped to its lowest level since February 2010. Despite this, gold miner EVN was in positive territory, but Regis Resources lost 5.5%.
The energy sector was the worst performer on the index as the poor EIA weekly results and low expectations for the OPEC meeting saw oil prices drop nearly 5% overnight. The energy sector lost 2.9%, with Origin, Woodside and Beach Energy seeing some of the worst performances.
The banks did not receive any respite also moving down into negative territory despite a number of days of strong buying this week. Financials lost 0.3%, with Westpac and ANZ seeing the worst performance of the Big Four.