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Weak data from China further contributed to the risk-off mood. The official manufacturing PMI fell to the lowest level in three years, slipping into contraction zone for the first time in six months.
The National Bureau of Statistics said ‘there is insufficient growth momentum in the country’s manufacturing sector’. While many focused on the headline manufacturing reading, we feel that more attention should be given to the services sector.
The Caixin services PMI eased to 51.5 in August, the lowest in over one year. As the country is undergoing economic restructuring, shifting towards a consumption-based economy, the services sector is expected to grow in increasing importance.
While Chinese markets were posting losses by mid-afternoon, one can’t help but wonder if the ‘national team’ may enter the fray in the last hour to ‘rescue’ the stocks. There is a strong belief that the government would protect the 3000 level in the Shanghai Composite ahead of the Victory Day parade.
This means that the grind lower this week may be slower than expected. Next week, however, might be a different story. As my colleague Angus Nicholson noted, the price-to-book (P/B) ratio of the Shanghai Composite is quite close to its long-term average. Investors may be genuinely enticed to build long positions in the stock market when prices fall further and become more favourable.
Meanwhile, the RBA kept cash rate unchanged at 2.00% and maintained a neutral bias. AUD/USD was bounded in a tight band as a result. The Australian central bank noted that ‘further information on economic and financial conditions’ are needed for the Board’s assessment of outlook as well as the appropriateness of the prevalent monetary policy.
So it looks like the RBA is also in a ‘data-dependent’ mode for now. In the currency market, euro and yen were kept in demand by a USD retreat. USD/JPY is testing 120.50 while EUR/USD moved towards 1.1300. For Asia, SGD also benefited from the greenback weakness, with USD/SGD pulling back towards 1.4050. The ringgit was one of the region’s best performer, continuing to strengthen to 4.15 per dollar from nearly 4.30 last week.
Oil hits a snag
Crude oil saw a tremendous rebound in the last few sessions, but the ‘strongest rally in 25 years’ was stalled on the first day of September on speculation that supply is still expected to rise ahead of an Energy Information Administration (EIA) report due on Wednesday.
WTI surged 27.5% from 27 to 31 August as news that OPEC is willing to discuss other global oil producers about cutting production to achieve ‘fair prices’. Furthermore, the EIA trimmed its US production forecast as it switched to a new survey, based on Bloomberg reports. Therefore, today’s pullback could be nothing more than a profit taking exercise. However, we could see real selling pressure coming in fast if there is no progress on the talks between OPEC and other producers.