All eyes on China

This morning’s focus will be on China. Over the weekend, China’s official non-manufacturing PMI showed strength, with data reaching 54.1 in July from 53.9 in the previous month.

The HSBC services PMI will be out later this morning and most investors are optimistic the data will reflect growth in the services sector, counteracting the slowdown we have seen in manufacturing. Chinese officials have been supporting the economy in specific sectors to halt the slowdown. Investors will take this as a positive sign, however it’s clear the services PMI has been on a decline and July’s number is at the low end of the spectrum.

Despite this, we should expect some movements in Hong Kong’s Hang Seng Index (HSI) and China’s equity indices. Chinese companies have come off a low base and the continued positive news on the economy could further improve sentiment.

It appears economists are expecting improvements from China for the rest of this week’s data such as trade, CPI, PPI and retail sales. We hold the view that although exports and industrial production might improve from recent investments, it will still lag. Retail sales will be the key number investors will focus on given the country’s objective to diversify from exports.

Gold

Gold rebounded from heavy selling, breaching our $1300 support line before rebounding and staying just above it. The next couple of days will be key in determining whether the medium-term bearish tone will overtake the short-term rebound. A lot depends on US sentiment and data this week, US ISM non-manufacturing index is expected to register a jump from 52.2 in the previous month to 53.1 in July.

The shift to and from gold have been tied to the economic recovery in the US, the drop in unemployment from 7.6% to 7.4% put talks of September tapering strongly back on the table, shifting sentiment back to a bearish tone.

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