Chinese manufacturing activity picks up in June

Good morning,

• Proshenko declares an end to cease-fire in Ukraine;

• Japanese stocks rally on increased monetary easing hopes;

• Chinese manufacturing activity picks up in June;

• Eurozone manufacturing PMIs and unemployment reports in focus.

A mixed session in Asia overnight combined with a busy day ahead in Europe and the end of the cease fire in the Ukraine is weighing on investor sentiment a little on Tuesday.

The situation in the Ukraine is unlikely to weigh too heavily on the markets at this stage as it merely signifies a return to a situation that the markets had already accepted, to an extent. The restart of fighting is clearly far from ideal but it did seem inevitable given that in recent days there have been protests in Kiev about the pro-Russian rebels refusal to fully respect the cease fire, with claims being made that they were taking advantage of the opportunity and attacking Ukrainian troops and making further gains. In response, President Petro Poroshenko has declared an end to the cease-fire, against the wishes of Russian, German and French leaders who had been trying to negotiate an extension to it.

Following the release of a number of key data points in Asia overnight, the markets are on course to end the day fairly mixed. Japanese stocks appear to be benefitting from the weaker yen which suffered some selling following the release of the second quarter Tankan surveys. The headline figures don’t make for great reading and suggest the economy was hit harder in the second quarter than was previously expected, but there are some encouraging points to take away, most notably the fact that larger firms are planning to increase their spending by 7.4% this financial year, which is more than previously thought.

However, I don’t think this is behind the rally in Japanese stocks overnight. The fact that companies appear to have been hit harder by the sales tax hike than the Japanese government was hoping, despite attempts made to offset any downturn with a boost in fiscal stimulus, may be enough to pursued the Bank of Japan to provide additional monetary stimulus which would further weaken the yen and provide support to Japanese exporters.

In China, the manufacturing sector appears to be benefiting from a round of targeted fiscal stimulus aimed at providing a small boost to an economy that was showing signs of slowing earlier this year. The People’s Bank of China has also played its part, with its own targeted monetary easing, and the efforts appear to be bearing fruit. The HSBC manufacturing PMI, despite being revised marginally lower, rose to 50.7 in June, it first growth reading (above 50) this year. At the same time, the official manufacturing PMI rose to 51 from 50.8. It would appear things are looking up in China.

As mentioned earlier, we have a very busy day ahead when it comes to economic data, which may explain the cautious approach from traders this morning. The manufacturing PMIs and Eurozone unemployment reports stand out as the key releases among them all, although this accounts for most of this morning’s releases so doesn’t exactly narrow it down. With the reports being scattered throughout the morning, we may see quite an uptick in volatility today, especially when compared with Monday. It doesn’t end there, later on we have more data coming from the US this time, with two manufacturing PMI readings being accompanied by the economic optimism survey and car sales.

Ahead of the open, the FTSE is expected to be 1 point lower, the CAC 9 points lower and the DAX 13 points lower.