Commodities have been notoriously China data-sensitive of late, and after the impressive three-day rally seen in oil markets, it is not surprising to see prices begin to slide again in the wake of China’s PMI data. WTI and Brent have both dropped more than 1% so far in Asian trading. The Nikkei also sold off heavily after the release of the Caixin PMI at 11.45am AEST.
China: confusing signals
China’s series of PMIs have not improved sentiment on its economy today. Whilst many were expecting poor numbers out of the manufacturing PMI, the big drop below expectations in the services PMI was most concerning (Caixin Services PMI was 51.5 compared to the flash estimate of 53.8). It has been argued that many of China’s high frequency data on the economy are overly biased towards the industrial sector (as in the oft-quoted Li Keqiang Index, for example), while the fast-growing services sector is largely ignored. China’s rebalancing of the economy requires robust and steady reallocation of labour to the services sector and away from the over-capacity industrial sector, and it is this element of the PMIs that is most worrying.
The policies coming out of China with regards to its equity markets are a cat’s cradle of contradictions. Reports that China will no longer support the stock market were followed up by clear intervention in the market last Thursday. The China Securities Finance Corporation (CSFC) was reportedly raising fresh capital for a round of stock support to quell volatility in the markets in the lead up to the World War II commemoration this week. Then on Monday, the China Securities Regulatory Commission (CSRC) announced a push for M&As, dividends and buybacks to boost the stock markets.
If one was a Chinese equity investor trying to invest with the government’s intended policy direction, then one would be throwing one’s hands up in confusion at this point.
It seems pretty clear that there are deep disagreements at the highest levels of the Chinese government over what to do with the equity markets. The Chinese government is no monolith, and many departments and organisations can pursue policies counter to each other. The CSRC likely has the most to lose from the stock market crash, given its importance in the bureaucracy is closely tied to the government’s faith in the capital markets. Former CSRC head, Guo Shuqing, discovered the difficulties of pushing through securities reforms without the backing of the government, finding himself pushed out to the Shandong provincial government after ruffling too many feathers in the central bureaucracy. The concern for the CSRC is if it’s perceived to have failed in its primary task of regulating the equities markets, it could lose further funding and power in this sphere to the People’s Bank of China (PBoC).
As the dust begins to settle over the stock market crash over the next few months, it will become increasingly clear who the winners and losers in the government have been. However, it would be wrong to draw the conclusion that the CSRC should be punished over this. If anything, the organisation is woefully under-staffed and under-resourced to be monitoring and regulating the securities industry in one of the biggest economies in the world. The Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) struggle to police US markets in this era of High Frequency Trading (HFT), and the CSRC has nowhere near the resources of those institutions.
As mentioned before, the Chinese markets are beginning to reach a level where they can start finding their own feet without the intervention of the government. The price-to-book (P/B) ratio of the Shanghai Composite (SHCOMP) is currently sitting at 1.81, very close to its long-term average of 1.69. It would be far better to leave the market to its own devices at this point, and focus reforms on improving compliance and reporting standards. Reforms that would help rebuild trust in the market, and allow prices to better reflect the prospects of the underlying businesses.
The Australian current account deficit is close to its largest on record – at -$19 billion (4.7% of GDP), it was far larger than the consensus figure of -$16 billion. Net exports are expected to decrease Q2 GDP by 60 basis points, as exports are affected by the slide in commodity prices, and import prices are in turn affected by the lower AUD.
As expected, the RBA decision left rates unchanged at 2%. While the RBA noted there had been “some further softening in conditions in China”, there was no explicit mention of the recent devaluation of the CNY. Judging from the statement, the RBA still plans to keep to its course of holding rates at 2% until they see the economy picking up again in 2017. However, there are indications that tomorrow’s GDP data could be worse than the 0.4% quarter-on-quarter expansion expected. With unemployment also slightly higher than the RBA’s forecasts, it will be interesting to see if they will continue to be satisfied with the economy’s trajectory into 2016.
The Aussie dollar had been moving up steadily today on expectations of a bounce on the back of Stevens not stating a desire to see further declines in the AUD. The Aussie has been taking a beating over the past few weeks, so it was also a good opportunity for short-covering.
The ASX opened lower off the poor overnight leads and has continued to trend down throughout the day, with declines increasing in intensity after the release of the Chinese PMI numbers. The index is now only slightly above where it was trading at on Tuesday last week, having given up most of its gains later in the week.
Surprisingly, even the energy sector couldn’t hold onto its early session gains off the back of the impressive rise in oil prices overnight, with the sector down 1.1%.
The index has been showing widespread declines across all sectors. All the major banks are down almost a percent or more, and all of the Big Four banks are now trading below their long term price-to-earnings ratio. The fact that investors are even eschewing high-yielding bank stocks with reasonable valuations is indicative of a very negative sentiment in the market.