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The yuan surged higher, along with everything else sensitive to China – including, stocks, copper, and commodity dollars.

• Strong China PMI data fuel recovery hopes
• Risk assets including stocks, copper, and FX majors all rebound
• But could the “higher for longer” interest rates narrative come back to haunt investors?

The first half of today’s session has been all about China, where strong PMI data renewed hopes that the re-opening of the economy has helped to kick-start the world’s second-largest economy. The yuan surged higher, along with everything else sensitive to China – including, stocks, copper, and commodity dollars. As with recent trends, whenever equities rise, the dollar tends to go lower and that’s precisely what has happened again today. US index futures climbed, although the gains were once again relatively mild compared to European markets while Chinese markets unsurprisingly outperformed the most. But will it be a day of two halves, as we transition to the US session?
 

Strong Chinese PMI data

In case you missed it, both the manufacturing and services PMIs were rather strong. The official manufacturing printed 52.6 while the non-manufacturing PMI index came in at 56.3. They improved significantly compared to 50.1 and 54.4 recorded in January. The closely-watched Caixin manufacturing PMI confirmed the rebound, printing 51.6 in February up from 49.2 in January. What’s more, the sub-indices of the PMI reports were also rather strong. For example, new manufacturing orders were at the highest since September 2017 and new export orders were the highest since March 2011, reflecting strong demand.
 

Markets caught between two narratives

The strong Chinese data means the markets continue to remain caught between the ongoing narratives dominating the agenda for much of February. These are: (1) a soft landing as opposed to a severe global recession and (2) sticky inflation, which is going to encourage the Fed and other central banks to maintain a contractionary monetary policy in place for longer.

These two ongoing narratives have kept things in the balance in terms of risk-taking in recent weeks, with US equities struggling and FX markets being somewhat volatile in ranges, with the dollar outperforming until today.

The focus is going to turn to US PMI data in the second half of the days and should we see a strong print there, this may cause the dollar to rebound from short-term oversold levels and in doing so weigh on US equities as expectations of higher rates for longer get another boost.
 

S&P 500 remains contained in the chop zone

Ahead of the release of US data and despite the strong performance in global markets, the S&P 500 remains inside a large chop zone, as shown by out US SP 500 chart.

The bulls have managed to cling to the 200-day average support for now, although they have not been able to push the market decidedly higher. The bears have also kept the pressure following every recovery attempt. So, it is yet unclear whether the bearish trend that began in 2022 has now resumed.

For now, the S&P has held support right where it needed to: around 3929-3950. This is the base of the previous breakout and corresponds with the 200-day average. That said, many short-term support levels have already broken such as 3994 and 4050. These levels must be reclaimed on a daily closing basis before the bulls become confident that the market wants to push higher. Unless that happens, I think the risks remain skewed to the downside despite the recovery. For confirmation, a clean move below the abovementioned support area would confirm the bearish reversal.

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