Chinese PMIs preview: Coronavirus-related plunge must be deep to push markets lower

Chinese PMIs are set to plunge in February amid coronavirus fears.
A devastating drop in manufacturing figures may be needed to trigger another market downturn.
If services PMI project ongoing growth, global stocks have room to recover.

Yohay Elam FXStreet

How much has coronavirus crippled the world's second-largest economy? The human toll of the respiratory disease is continuously updated, and reports of lockdowns, factory shutdowns, and profit warnings are in abundance. However, a big picture view is missing.

Purchasing Managers' Indexes for February – the first full month that virus news hogged the headlines – are set to provide answers.

Official and non-official PMIs

Authorities in Beijing kick off the reporting just as markets close for the weekend. The China Federation of Logistics and Purchasing releases its 3,000-strong Manufacturing PMI and 1,200-strong Services PMI on Saturday, February 29, at 1:00 GMT.

The manufacturing sector – and especially the automotive industry around Wuhan- was struck by Covid-19. Contrary to many services-sector jobs, factory work cannot be done from home. Bloomberg's survey has shown a potential plunge from 50 to 45 points – a considerable fall.

On the other hand, the services PMI is forecast to fall from 54.1 to 51.5 – above the 50-point level that separates expansion from contraction.

Just after markets open on Monday, Caixin, an independent media outlet, releases its PMIs. Similar to the official ones, Manufacturing is projected to drop from 51.1 to 47 and services from 51.8 to 50.5.

How will markets react?

Investors are bracing for horrible figures – based on real economic damage and fears regarding future deterioration. The stock market falls, record lows for US ten-year bond yields, seven-high peaks for gold, and other safe-haven flows already reflect fears.

The publication of two reports, which include two key figures, makes the reaction more complicated. Nevertheless, here are the broad lines of expectations.

Manufacturing PMIs

Any score between 44 to 46 would likely be considered within expectations given the market reaction.
A significant drop below that number, to 43 or below, would already consist of a downside surprise.
Holding at 47 or higher would already consist of a beat despite the drop to contraction territory.

Services PMIs

Holding to weak growth, with 50 to 51, would be within expectations.
Dropping below 50 – indicating damage to the services sector – could already weigh heavily on sentiment.
A score of 52 or above would show resilience and serve as an upside surprise.

When markets open in Asia, they will first react to the official figures. If both sectors miss or beat, gaps could appear on various charts. Figures closer to expectations or if the statistics offset each other – investors may wait nervously for Caixin's figures.

In case of a positive – or not so horrendous outcome – stocks, oil, and commodity currencies are set to advance while the yen and gold slide. EUR/USD and GBP/USD could retreat as US bond yields rise and provide support to the dollar.

Weak figures may send shares, commodities, and linked currencies lower, as the yen and gold advance. EUR/USD and GBP/USD may come under pressure in this scenario.

Conclusion

Forward-looking PMIs from China is expected to provide a snapshot of the coronavirus damage in the world's second-largest economy. Investors are pricing in significant falls in official and independent figures and for both the Manufacturing and services sectors. All markets are likely to react at the open and later on.

More Dollar domination set to continue, with or without coronavirus fears

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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