China manufacturing activity plummets

While most global equities are experiencing some consolidation at the moment, it is a completely different story in China, where the gains just continue to roll in.

Source: Bloomberg

Focus today has been on the latest HSBC manufacturing PMI reading, which slipped below 50, coming in at an 11-month low of 49.2 and below expectations of 50.5.

China’s growth target for 2015 was one of the key events of the year and this, plus the growth target of around 7%, was enough to keep investors appeased.

Additionally, Premier Li came out with some commentary that placed a ‘put’ in the market as it suggested officials will be willing to support growth if it falls short. While this is the case, I feel there are deeper concerns for the economy as activity is shrinking, company profits are retreating and asset prices like property are subdued.

As a result, equities have actually been moving in a completely opposite direction to other asset classes, leading to some very lofty valuations.

Excessive speculation in equities has been a problem for China for a while now and, unless they get the support of a strong underlying economy, then it’s hard to see this situation end well.

 In recent times, banks have been very conservative in lending even when the PBoC acts to ease liquidity pressure. This is not an ideal situation as it suggests measures won’t be as effective as they were in the past.

The disappointing HSBC flash manufacturing PMI today puts additional pressure on industrial profits data, which will be released on Friday. The last reading showed an 8% drop.

For the moment, though, it seems investors feel faltering growth will be supported by officials and this could keep equities bid.

Rates expectations adjusted

The ASX 200 has edged higher, with focus remaining on policy expectations. Repricing of rate cut expectations following the China data has also been interesting, with the probability of an April cut rising from 44% to 49.2%, while that of a May cut rose from 94% to a touch over 100%.

Subdued activity in China adds to pressure on the domestic economy and the AUD has also reflected the change in expectations on the back of this data. AUD/USD was testing $0.7900 primarily due to USD weakness but this latest data has knocked some of the wind out of its sails.

For equities, it’ll be interesting to see if this change in the swaps market will fan the yield plays further in the near term. However, the concerns for resource names are likely to remain intact and the culling of costs will be a key theme going forward.

The only way for most of these miners to maintain profitability as revenue falls will be aggressive cost cutting.

Greenback remains front and centre

The Fed meeting might be behind us but we continue to see rates lift-off expectations being adjusted. Yesterday, focus was on vice chair Stanley Fischer, who gave a comprehensive view of what he expects from policy going forward.

Fischer feels a rate hike is likely warranted this year and the path thereafter is unlikely to be steady. Instead, it’ll continue to be data-dependant, which essentially means there is no rush unless data is shooting the lights out.

Loretta Mester was also on the wires saying June lift-off is still a possibility. However, given what we’ve recently heard, this seems far too soon.

On the docket today will be February CPI, while Fed member James Bullard speaks. Perhaps of even greater interest was the impact Fischer’s comments had on the greenback as we saw it lose some ground.

Weaker open for Europe

Ahead of the European open, we are calling the major bourses weaker. The euro is holding its ground against the greenback and that’s not ideal for European equities at the moment. There is a lot happening in the eurozone and, given Greek Prime Minister Alexi Tsipras is currently visiting Berlin, you can never rule out some volatility on headline risk.

On the economic front, we have a raft of manufacturing and services PMIs to look out for and on recent indication it seems we could be in for a slight improvement. This would be a positive for equities and could encourage investors to buy the dips. In the UK we have CPI and PPI due out.

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