China's flash manufacturing PMI falls

Market Brief

The dollars, Fed minutes inspired rally, has continued today as the release of a soft Chinese manufacturing triggered selling of high-yielding EM FX. HSBC/Markit manufacturing PMI dropped to a 3-month low of 50.3, meaningfully lower than the 51.5 expected result (prior read of 51.7). Softness was broad-based across sub-indices yet new orders was significantly weak falling to 51.3 from 53.7 (although still above 50 expansion threshold) in July. This is concerning as new orders serves as a barometers for domestic and foreign demand. With the Chinese economic recovery seemingly unstable, investors were quick to rotate away from risky EM FX. That’s said, equity markets were balanced as the weaker JPY helped Nikkei rise 0.85%, while the Hang Seng and Shanghai dropped -0.75% and -0.67% respectively (at the time of writing). S&P futures are slightly higher going into the European session. EURUSD spent most of the session on offer following the release of the Fed minutes which suggested intense debate on starting the tightening cycle “sooner rather than later.” For most of Asia, EURUSD was basing around the 1.3250 handle as traders prepare for release of EZ Flash PMI data. The market is currently heavily short EUR, so an upside surprise should trigger decent short covering. USDJPY was already at 103.80, after the hawkish fed minutes, and was unable to gather the buyers to challenge 104.00. However, with the JPY the funding currency of choice and expectations of US yields moving higher it’s just a matter of time before we test near-term resistance. In other Japanese news, data indicates that investors continued to buy foreign assets last week, adding ¥660bn in foreign bonds and ¥263bn in foreign equity. As expected, AUDUSD traded lower to 0.9238 on the weaker Chinese PMI data despite conference board leading index rising 0.4% m/m in June following a gain of 0.2% in May. Commodities remain soft as oil edged down to $102 as ample supply and slowing demand (amplified by Chinese worry data) damaged prices.

Euro-Area PMI

In the European session, traders will be watching euro-area PMI and euro-area consumer confidence. In broad terms, we expect softness in both data sets indicating further deterioration in Europe’s economic condition. This should fuel further speculation of ECB stimulus and raise expectations for ECB President Draghi’s comments from Jackson Hole tomorrow. In the UK, retail sales ex-auto may reverse declines by increasing by 0.4% m/m and 3.5% y/y in July. Given the MPC minutes indicating dissention in the ranks we suspect that the tightening argument will gain pace despite softer economic data and should keep GBP supported. In Norway, investors anticipate mainland Q2 GDP growth to increase by 0.6% q/q.