Asian markets had already opened poorly off the back of the US close, but China’s flash Caixin Manufacturing PMI drop to its lowest level since 2008 only served to add fuel to the fire.
Fed-related uncertainty has been driving volatility since they left rates on hold at their meeting last week. Janet Yellen proffered some serious caveats about employment growth in the US, emphasising her concern over the participation rate and continued high rates of involuntary part-time employment.
But since that meeting, a number of Fed speakers have been keen to emphasise they are happy with employment growth and would be prepared to look through inflation to hike rates this year. These statements give further credence to the argument that the delay in the rate hike was driven largely by global market volatility concerns.
This presents an issue, for if the Fed is so sensitive to global market gyrations then the market volatility in the lead up to the decision could then prevent them from raising rates every time they approach a potential rate hike date. How then can rates ever be raised?
Thus, divergent interpretations of the Fed decision and concomitant concerns about global growth continue to engender a highly volatile global market environment where any unexpected bad news can prompt dramatic rounds of selling. This seemed to be the case in Europe as the VW scandal about emission reporting in their diesel cars spurred a selloff in all auto companies and industrials in Europe. And then in Asia, we received the much-awaited flash Caixin manufacturing PMI number for China…
The Chinese PMI undershot expectations for 47.5, coming at 47.0, lower even than July’s 47.3 – the lowest reading since April 2008. The sub-components of the index were unanimously bad, and the release should understandably add to concerns about the Chinese economy. Caixin economist, He Fan, noted in the release that “fiscal expenditures surged in August, pointing to stronger government efforts on the fiscal policy front.”
Certainly, the factory closures around Beijing and Hebei relating to the athletics championship and the WWII commemoration, as well as the Port of Tianjin explosion on 12 August, will have weighed on output somewhat. Nonetheless, the problems China faces in reaching its 7% GDP growth target as we approach the final stretch of the year are becoming increasingly stark. Consumption and the services sector have been performing well in China, but to hit the growth target output they will really have to start turning it around in the next few months.
Understandably, markets did not react well to the PMI news.
The Hang Seng China Enterprise Index immediately dropped 1% on the release and has continued to decline 2.5% throughout trading. CITIC Securities fell 7% on news that the Chinese government has accused them of systematically front-running trades ahead of state-sponsored stock purchases to support the market.
The Australian dollar took the news particularly dramatically, immediately falling about 0.8%. The Aussie has now clearly broken out of the short-term uptrend it has been trading in since 8 September. Speculation the Fed would leave rates unchanged led to the Aussie rising 5.3% between 8 to 18 September. But since that news was digested, the Aussie has been trading in a renewed downtrend and looks ready to test its 7 September lows just above the $0.69 level.
But most of all, one wonders what will happen when the Nikkei and Topix reopen tomorrow after a three-day holiday. Currently, we are calling for the Nikkei to open down 2.75%, which would be a dramatic selloff. And a selloff of such a scale as Japanese markets play catch up could spill over to all markets in the Asian region during trade tomorrow.
The ASX has been pummelled by foreign developments today. It was already down 1.2% after the first hour of trading today, but after the Chinese PMI came out at 11.45am the index plunged downwards, even breaking through the 5000 level. The global risk-off sentiment has seen commodity prices swoon again, and this has hurt the materials and energy sector with renewed vigour. But materials have declined 3.2%, significantly more than other sectors as BHP’s shares took a bruising.
BHP released its annual report today, providing limited additional information since its annual earnings report last month. However, its stock suffered during London trading, falling 5.1%, and this has continued for its ASX listing, which has dropped 4.4%.
BHP announced that Australian shareholders will have to vote on a plan to pay the dividend for BHP’s London listing out of the Australian entity’s earnings. The issue is that while the ASX-listing’s dividend is fully-franked and receives the corresponding tax benefits, the dividends to the UK listing will not receive tax benefits. BHP also announced it is planning a hybrid capital raising as US$13 billion of short-term debt is set to expire within the next five years. All of these factors seemed to weigh on the stock today, alongside a general negativity around the materials sector.
Indeed, today was a rare occasion in that the six worst performing stocks were all in the materials sector (LNG, IGO, SYR, EVN, S32, OZL).
The banks were also hit heavily today, with the whole sector down 2.6%. Concerns about the global economy, and particularly today’s data out of China, have affected sentiment about the Australian economy. Banks are some of the best bellwethers for investor perception on the Australian economy, and the drubbing they took today does not bode well for the outlook.