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The big miss in China’s flash PMI rubbed salt to the wound. Preliminary estimate of the Caixin manufacturing PMI, which mostly poll small and medium Chinese manufacturers, unexpectedly worsened to 47.1 for August, the lowest level since March 2009. The market was looking for an improvement to 48.2 from 47.8 previously.
Analysts believed that the stimulus measures have not transmitted through to the manufacturing sector yet, and we could see further contraction in September. However, a rebound is anticipated in the fourth quarter as stimulus funds translate into local government spending.
Likewise, the official PMI has been stagnant around the key 50 mark and the reading for August is due next month.
The Shanghai Composite briefly dipped below 3500, but was immediately met with strong bids. This gave credence to the view that the Chinese government is keen to protect the 3500 level. The question will be how long the authorities are willing to defend it, especially if the global equity markets retreat further.
Bloomberg noted that the Chinese regulator may allow pension funds to invest in the stock market. Against the backdrop of tighter liquidity conditions, analysts are calling for more easing of the reserve requirement ratio (RRR) to ease the credit situation. With the downtrend in global equities, persistent commodity slump, and weak Chinese manufacturing activity, some expects RRR cuts of 50-100 basis points to be announced over the weekend.
The Straits Times Index (STI) easily punched through psychological 3000 barrier to the lowest since November 2012, as investors’ panic led to heavy selling pressure. The index dropped rapidly before encountering strong support at 2950. Amid the frenzy long liquidation, Noble was surprisingly resilient, keeping afloat above SGD0.40 as commodity traders worked feverishly to increase its bank lines by pledging its inventory as collateral.
Yen and euro gain at the expense of USD
Apart from the selloff in regional stocks, risk-off sentiments were clearly reflected in the currency market. Demand for the Japanese yen increased, with USD/JPY dropping below 123.00 to five-week lows. Interestingly, EUR/USD advanced beyond 1.1250, benefiting more from the USD slide, than improvement in the outlook for the European bloc.
In Asia, USDCNY was steady near the 6.40 handle, while the USD/CNH (offshore yuan) is trading at a 0.8% premium to the onshore renminbi. While USD/SGD is still elevated, the pair remained bounded within 1.40-1.41, as the city-state’s monetary authorities keep a close eye on the exchange rate.
Recent dollar weakness has kept Asian currencies supported, although they remained under pressure against other major currencies. For example, the SGD continued to depreciate against the euro and the yen, heading to multi-month lows.
Crude oil stayed under pressure, with WTI heading for the eight-weekly decline. WTI prices are currently protected by $40, although this barrier could be broken sooner rather than later, due to oversupply conditions unlikely to improve in the near term. The Continuous Commodity Index (CCI) remained capped below 400, although the rebound in gold prices may have helped lift the index off the six-year lows.