What To Look At Next Week

China's manufacturing and non-manufacturing PMI have fallen for three consecutive months through February. The manufacturing PMI has fallen from 52.1 last November, which was the high for the year, to 50.6 in February, distorted by the lunar New Year holiday. The non-manufacturing PMI fell to 51.4 from the 2020 high set in November at 56.4. The time series is not particularly long, but it appears that March's composite PMI has consistently improved from February. There is no reason to expect this pattern to be broken.  

Press reports and anecdotal stories suggest that China's appetite for industrial metals has slackened. The idea is that part of the demand had reflected the building of inventories, and this apparently has been satisfied. At the same time, foreign portfolio managers who had been enthralled with Chinese bonds and equities appear to be having second thoughts.

The 10-year premium that China offered over the US was more than 220 bps at the end of 2020 after peaking near 250 bps in the middle of November. It is now holding just above 150 bps. Chinese equities have been a disappointment in the first part of 2021. The Shanghai Composite is off more than 3%, and the Shenzhen Composite has fallen 7%. Efforts by the government, reported in the press, were largely ineffective. It is the worst-performing large market.

For all practical purposes, the yuan is flat against the dollar (~-0.20%). Yet, those 20 bps are a third of the quarterly yield pick-up for the Chinese bonds over US Treasuries. Russia and Turkey have played up the need for an alternative to the dollar and "Western" payment system. Chinese officials appear to have kept quiet. A more significant role for the yuan requires it to be freely convertible, and they do not seem ready to surrender that kind of control. The three-month actual volatility is about 1.7%. Only the pegged Hong Kong dollar has lower volatility than the yuan.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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