China Leads the Way | Daily Market Commentary with Jeffrey Halley

China Leads the Way | Daily Market Commentary with Jeffrey Halley

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Today’s pan-Asia PMI releases were a mixed bag with one noticeable exception, China’s Caixin Manufacturing PMI for August again impressively outperformed. The Caixin PMI rose to 53.1 from 52.6 in July, reinforcing that China is leading the region out of the pandemic recession. The result was more pleasing as the official Manufacturing PMI yesterday stalled, even as services surged. The net result between the two releases suggests that China is firing on nearly all its cylinders.

Elsewhere, the regional PMI’s were a mixed bag and not as positive as I had expected. Thailand, Japan, South Korea all improved, although they are still in contraction territory. Taiwan continued to outperform, while Vietnam and Malaysia went backwards. It suggests that the recovery ex-China is still uneven and more than a little fragile. In itself, it will not be enough to derail local currencies and equities, as that it a US Dollar and a search for yield story. One bright note would be that the major economies of Asia continue to show consistent improvement.

Australia’s Q2 Currency Account climbed to a record AUD 17.7 billion this morning, with Building Permits for July sharply rebounding to 12.0% in July from -4.2% in June. The lucky country’s exports are powering ahead on China demand for commodities, while domestic activity continues to rebound after the Covid-19 lockdowns. That won’t be enough to sway the Reserve Bank of Australia this afternoon at 1230 SGT. We expect the RBA to remain unchanged with a strongly Fed-like lower for longer, whatever it takes guidance. One thing they will not mention is negative rates, where thankfully they are refusing to enter that monetary policy box canyon.

The positive data was not enough to lift Australian equities today though, with markets focused on the detention by China of a China-based Australian journalist. Markets are fretting over the deterioration of relation between China and Australia, with China launching “probes” into Australian wine, beef and barley as well. I do believe concerns are overblown though. Despite the rocky relationship, China has not touched the holy trinity it receives from Australia, thermal coal, iron and copper ore. With China’s economy clearly recovering, Australia is likely to dodge the worst of China’s kneecapping approach to international relations with countries that disagree with it. Except for Australia and the United States though, most other nations and blocs should probably continue to wear protective padding.

China data lifts Asian equities.

Wall Street beat a modest retreat overnight, except the Nasdaq, which one again, powered higher, boosted by Apple, Tesla and Zoom. The S&P 500 fell 0.23%, the Nasdaq rose 0.68% to another record high, and the Dow Jones lost 0.80%.

After a slightly negative start in Asia, positive China data has lifted spirits across the region, with stock markets unwinding early losses. The Nikkei 225 is flat, with the Kospi rising 0.90%. China’s Shanghai Composite and CSI 300 have risen 0.15% with the Hang Seng up 0.10%.

Singapore remains in negative territory, lower by 0.50%, but Kuala Lumpur, Jakarta and Manilla have climbed around 0.25%. Australia is the regions laggard as the Australian Dollar climbs to highs last seen in late 2018. The detention of an Australian journalist by China has also raised the trade relations temperature, whilst weak property price data has added another cloud. Although I believe the effects are transitory, the ASX 200 and All Ordinaries have sunk by 2.20% today.

Australia aside, the China data should give markets a boost of cautious optimism that should flow over into European equities this afternoon. Although the ascent of the Euro and Pound may temper economic recovery exuberance.

The US Dollar continues to weaken.

The greenback continued on its downward path overnight and has weakened further in Asia. The dollar index has fallen by 0.30% to 91.80 today after the PBOC’s firm CNY fixing. The dollar index is now below its 92.00 support region and targets further losses to 91.00 in the days ahead.

In the G-10 space, the EUR/USD has climbed 0.40% today to 1.1990, a 2-year high. Resistance lies nearby at 1.2020, with further gains possible to 1.2150 if broken in the days ahead. GBP/USD has climbed 0.30% to 1.3410, a near one-year high today and now targets further gains to 1.3500 initially. AUD/USD and NZD/USD made further gains overnight and have risen 0.40% this morning.

If pro-cyclical G-10 currencies have outperformed, the same can also be said for Asian currencies. The CNY had another strong fixing this morning, with the PBOC seemingly quite comfortable with recent strength. The 6.8498 fixing rate saw USD/CNY fall through 6.8400 today, boosted by robust China data. USD/CNY now targets 6.8000 and recent outperformers such as the Ringgit, Baht and Singapore Dollar, are likely to follow suit. China’s outperformance is adding another driver for a weaker US Dollar.

The Indian Rupee has ignored an India/China clash in the Himalaya’s overnight, and shocking GDP data yesterday to post further gains this morning. Having broken support at 74.00 last week, USD/INR is testing support around 73.00 this morning, targeting further losses to the 70.00 area, much to the Reserve Bank of India’s relief. If nothing else the story of the INR is the story of a weak US Dollar and highlights the momentum the weaker Dollar trade has. It is also a boon for Asia, allowing central banks around the region, almost all of whom run a soft Dollar peg, room to ease monetary policy if necessary.

With no sign of the US Dollar’s momentum waning in the short-term, Europe should see further appreciation versus the greenback, with pro-cyclical currencies outperforming.

Robust China data lifts oil in Asia.

The sunshine cast by China’s PMI data across other asset classes has also fallen on oil. Both Brent crude and WTI are 0.50% higher in Asia after trading sideways overnight. The apparently healthy recovery in China, and a steady improvement across the rest of the Asia-Pacific has lifted consumption hopes which have flowed into higher prices today.

Brent crude has risen to $45.75 a barrel, just above its 200-day moving average (DMA) at $45.70, that has capped rallies of late. Having spiked briefly above $46.00 overnight, Brent crude’s initial target is the $46.50 a barrel, recent highs. A daily close above the 200-DMA would be a positive technical development, and a move through $46.50 a barrel opens up further gains to $48.00 a barrel.

WTI has risen to $43.00 a barrel in Asian trading, and initially targets its overnight highs around $43.50. A move through that level should inspire further gains to $44.00 a barrel, with a daily close above there opening up a much larger rally to $48.00 a barrel.

Having long been of investors radars, oil markets are well overdue a day in the sun. Today’s China data and a consistently weaker US Dollar could be that catalyst.

Gold and Silver power higher on a weaker US Dollar.

Gold and Silver enjoyed a modestly positive overnight session, as they consolidated their substantial gains from the day before. That strength has accelerated in Asia though as the US Dollar weakened notably in the Asia morning session. Gold has climbed 1.0% to $1987.00 an ounce, and Silver has risen 2.0% to $28.7000 an ounce.

Both metals look poised now to test resistances at $2000.00 and $29.0000 an ounce respectively, with momentum notably picking up strength. The precious metal rally is as much of a Dollar weakness story as anything. With US yields continuing to edge lower, further eroding Dollar strength, the planets are aligning for further gains by both metals on both a short, and long-term basis.