China continues to weigh on world markets

Market Brief

World stock markets ended last week on a positive note, with Chinese mainland shares recovering more 10% losses in two days. However, this week is a different story as stocks from across the globe are moving into negative territory again. Wall Street ended the first day of the week in red with the S&P 500 down -0.84%, the Dow Jones down -0.69% and the Nasdaq down -1.07%. Unfortunately we may not have reached a bottom yet as Asian regional markets plunge further, dragged lower by weak data from China. China’s official manufacturing PMI contracted to 49.7 in August, matching expectation, from 50 a month earlier. In addition, the final August Caixin manufacturing PMI printed at 47.3 versus 47.1 median forecast - a reading below the 50 threshold indicates a contraction. The Shanghai Composite retreats 1.06% and the Shenzhen Composite loses 4.61%. Regional benchmarks follow the Chinese lead as Japanese Nikkei dropped 3.84% and the Topix index -3.83%. In Hong Kong, the Hang Seng fell 0.76% while in South Korea the Kospi index retreated 1.40% as exports fell the most in 6 years. Exports contracted 14.7%y/y in August versus 5.9% while imports contracted 18.3%y/y verse 15% expected. All in all, August’s trade balance came in at $4347mn versus $6077mn median forecast.

Unsurprisingly, the Reserve Bank of Australia kept the cash rate unchanged at record low 2%. In the accompanying statement, the RBA stated that “monetary policy needs to be accommodative” as the economy is expected to continue expanding at a moderate pace. Governor Stevens maintained that “The Australian dollar is adjusting to the significant declines in key commodity prices”. All in all, the RBA seems to be comfortable with the current level of the Aussie, especially since the AUD lost more than 4% against the USD since their last meeting in early August. AUD/USD reacted negatively to the decision and is grinding slightly lower since then. On a side note, we think it is odd that Governor Stevens didn’t mention recent developments in China, suggesting that the RBA is waiting until the smoke clears to assess the effects of a persisting slowdown in China.

In Europe, equity futures are pointing to a lower open across regional markets. Futures on the DAX are down 1.63%, ones on the CAC -1.55% while the ones on the SMI fell 1.04%. Crude oil is sliding lower with the WTI retreating 2.89% while its counterpart from the North Sea falls 2.55%.

In the FX market, the US dollar is under pressure as market participants are still waiting on strong data from the US to resume the dollar rally. A strong reading of Friday’s non-farm payrolls will therefore be key to maintain a September rate hike on the table as a reading in line with expectations will not be sufficient to ensure a September lift-off. EUR/USD is back above 1.1262 (Fib 50% on July-August rally) and will need fresh boost to reach the closest resistance standing at 1.1368 (Fibo 38.2%). A weak ISM Manufacturing reading this afternoon could be that trigger. On the downside, a support can be found at 1.1155 (Fibo 61.8%).

Today traders will be watching unemployment change from Germany; PMI from Switzerland; Markit manufacturing PMI from France; mortgage approval and market manufacturing PMI from UK; unemployment rate from the Euro zone; GDP from Canada; Markit manufacturing PMI from Brazil; construction spending and ISM manufacturing from the US.