SCOREBOARD: China defiance

Data from China and the US defied downbeat narratives, while today’s Reserve Bank meeting remains very much live.

Aussie stocks may have slumped yesterday, taking off 1.7 per cent from the index, but stocks in Asia (even in China), Europe and the US pushed higher. Not a great start, in Australia at least, to the new financial year and another symptom of this hit to confidence that has been wrought by the campaign to weaken the Australian dollar and lower rates. 

Elsewhere around the world the mood is much better. We’re talking gains of around 0.3 per cent on the Dax, 0.8 per cent on the CaC and 1.5 per cent in the FTSE100. US stocks closed around half a per cent higher on the S&P500 ( 0.5 per cent to 1614) and Dow ( 0.4 per cent to 14969), although the Nasdaq was up closer to 0.9  (3433).

There are a few things to note here. On the data side we saw the ISM index up nearly 2 points to 50.9 in June which doesn’t sound like a lot, but it does take the index above the 50 mark which seems to spook some.  Don’t forget this is actually good index, one of the few I take seriously.  Within that index, production and new orders shot up, as did prices. On the downside, the employment index dipped. All in all though it was a good report which shows the US economy continuing to expand and indeed at a faster pace.

This report complements a positive Tankan survey out of Japan yesterday showing business there more confident about things and even China’s PMI was positive. How so when it fell? (I’d note Chinese stocks actually rose).  Well the PMI itself was actually little changed at 50.1 from 50.8, but the observation to take out of it, is that it didn’t fall hard. Recall that the China narrative states that the economy is weak – probably weaker that the official GDP numbers suggest. There is also talk of a credit crunch. The reason the PMI was positive is that it isn’t showing any of this–- it’s showing steady growth. And that is the key message investors should take from it.

The positive global manufacturing data saw a solid rebound in the commodity space for once although volatility here is so high, how long it lasts is anyone’s guess. Call it a moment of sanity. Anyway, copper surged 3.2 per cent, crude was up 1.5 per cent ($98.01) and even gold managed to push higher ($29 to $1252) although that follows a 20 per cent plus fall in the second quarter.

Price moves were otherwise non-descript and the Australian dollar was up about 44 pips to 0.9235, the euro was 30 pips higher to 1.3062, while the yen hovers around target at 99.64. On the rates side the US 10-year Treasury yield fell about 4 bps to 2.47 per cent.

There wasn’t really much news otherwise. Just note that the eurozone unemployment rate rose slightly to 12.1 per cent in May from 12 per cent, and against an expectation of 12.3 per cent. Eurozone inflation was at 1.6 per cent year-on-year to June. Finally, US construction spending rose 0.5 per cent in May roughly in line with expectations and following a 0.1 per cent rise in April.

For today the SPI suggests Aussie stocks will be little better than flat, the index rising 7 points. At 1430 AEST the Reserve Bank meet and while few expect a cut at this meeting the consensus is for August.  As I outlined yesterday, August could present some difficulties for a board that is targeting a weaker Australian dollar and has stated bluntly that they still think it’s too high. Noting the difficulty markets have in assessing the chance of a rate cut (given that no one knows what the Australian dollar target is), that would have to keep today’s meeting very live. At the very least I suspect a dovish statement can be expected and unfortunately this will continue to weigh on business and consumer confidence and ensure international investors remain wary of Australia as an investment destination.

Other than the Reserve Bank we see US factory orders tonight and a speech by the New York Fed president ( and FOMC voter) on the US economy.

That’s the lot, hope you have a great day…

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