Equities bounce on China data

Asia has been pinned on the latest HSBC manufacturing PMI print out of China – there was some nervous trading going into this reading after a string of disappointing data out of China recently.

Source: Bloomberg

Contrary to pessimistic expectations, the private PMI print came in at 50.5, better than estimates of 50 and above the previous 50.2 reading. This instantly lit up the boards and saw sentiment pick up across regional equities. The composition of the reading was also fairly good, with new orders (52.3) and new export orders (53.9) rising while output held steady at 51.8.

With rumours that China is conceding defeat and will officially lower its growth target, along with speculation there won’t be further China stimulus, it was crucial for today’s reading to show some positive signs. After last week’s alarming property figures, concerns have certainly deepened and this will perhaps test officials’ resolve and their commitment to only issuing targeted stimulus.

Some reports have suggested the PBoC is loosening restrictions in mortgage loans to help stabilise the property market. With today’s developments in mind, equities in China are leading Asia higher while Japan is closed for a bank holiday.

Banks lead the ASX 200 higher

The ASX 200 traded at its lowest since March before reversing higher on the back of China’s manufacturing print. For the local market, the story continues to surround iron ore and the price slide, which has seen it trade below the $80 mark – its lowest since September 2009.

Iron ore futures have continued to fall in Asian trade but analysts feel we are close to the bottom and prices should gravitate back above the 90 mark towards the back end of the year. In the near term though, it will remain difficult to pick the bottom in the iron ore names.

Among the pure plays, Fortescue has been the most impressive today after finding support in the $3.50 region. This has triggered some bargain hunting but I still feel the sellers are lurking and will be looking to take advantage of any bounces towards $3.90 for fresh selling.

Today’s gains are primarily in the banks, which had started to appear oversold on most metrics. Investors have taken advantage of this and jumped into the banks and other yield plays like Telstra. However, given the yield trade seems to have run its course, it’ll be interesting to see if this recovery has legs.

Greenback focuses on Fedspeak

Perhaps the most interesting development in US trade involved comments by New York Fed president Dudley, who said he wants to get off the uncomfortable zero lower bound as soon as he thinks it’s appropriate. Dudley feels being at the bound limits policy options and punishes savers.

He focused on full employment as a key trigger for a rate hike while discussing the pros and cons of policy normalisation. While he didn’t really explore raising rates sooner than the market expects, his comments are consistent with what I expect to hear from other Fed members this week.

There is plenty of Fedspeak lined up, with the likes of Bullard, Powell, George and Kocherlakota on the wires today. This should see a hawkish shift in language and continue to underpin a firmer US dollar.

Mixed open for Europe

Ahead of the European open, we’re eyeing a relatively mixed open – the FTSE a touch firmer with the rest mildly weaker. The PMI theme will continue, with manufacturing and services readings for France, Germany and the region due out.

ECB President Mario Draghi’s comments yesterday have not done much for sentiment, despite reinforcing the central bank was prepared to take further action. However, it seems to have been enough to stabilise the single currency, which continues to hold on to the $1.2800 handle against the greenback. Should PMI readings later today disappoint, we could see renewed selling in EUR/USD and a slump towards July 2013 lows in the $1.2750 region.

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