EC China Disappoints, But The Yuan Remains Strong

Overview: The sixth decline of the S&P 500 in the past seven sessions set a negative tone for equity trading in the Asia Pacific region, and the poor Chinese data did not help matters. News that China's troubled Evergrande would miss next week's interest payment weighed on sentiment too. Only South Korea and India of the large markets in the region managed to escape unscathed, even as North Korea tested ballistic missiles for the second time in a week.

European bourses have also eased, falling for the second consecutive session and six of the last seven. Meanwhile, US futures are posting small gains. The US 10-year note has also stabilized around 1.27% yield. Yesterday's rally in the US saw Asia Pacific yields ease, except in China. European yields are softer too. The dollar is trading with a heavier bias. The Scandis and the yen and Swiss frac are leading, while the dollar-bloc and sterling are lagging. Emerging market currencies are also mostly higher today, and the JP Morgan index is firmer. It would be the fourth gain in the past five sessions if sustained.

Despite the disappointing data, the Chinese yuan remains firm, leaving the dollar weaker than the CNY6.45-CNY6.50 band that has confined the greenback since mid-June. Gold posted an outside up day yesterday, but no follow-through buying has seen some late longs exit, pushing the yellow metal back below $1800 in Europe. News that China's steel production fell weighted on iron ore prices, which have now fallen in 11 of the past 12 sessions. Copper is rising for the first time in three sessions. Oil prices are firm, with the November WTI contract trying to establish a foothold above $71.00. API reported a 5.4 mln barrel drawdown and if confirmed, would leave US inventories at two-year lows.

Asia Pacific

China data disappointed. August retail sales rose by 2.5% year-over-year, down from 8.5% in July and sorely missing the 7.0% median forecast in Bloomberg's survey. Industrial output slowed to a 5.3% year-over-year pace from 6.4%. Economists projected a 5.8% pace. Steel output fell to its lowest level since March 2020. However, Beijing has promised to cut output this year, and it is still up 5% year-over-year, warning of the risk of further cuts. Fixed asset investment slowed slightly more than expected, to an 8.9% year-to-date annual pace, down from 10.3% in July. Construction is off by about 3.2%. The lockdown in Nanjing and base effects may have contributed to the weaker economic readings. The economy is likely to stabilize in Q4 before recovering in Q1 22.

Beijing announced it would hold the first oil auction on September 24 as it taps its strategic reserves of an estimated 220 mln barrels to help ease price pressures. It will auction 7.38 mln barrels of various grades that were put into storage last year. Domestic end-users, in good standing, would be allowed to participate. However, it seems too small to make much of a difference to global prices and accounts for less than one day of China's imports.

There are three other data points in the region to note, two of which are from Japan. First, core machine orders, a lead indicator of capex, rose by 0.9% in July, well below expectations, reflecting a smaller recovery from the 1.5% decline in June. Second, separately, after expanding in Q2, the world's third-largest economy is off to a weak start in Q3 as the tertiary industry index (services) fell by 0.6%, defying expectations for a 0.3% gain. Finally, South Korea reported an unexpected drop in unemployment to 2.8% from 3.3%. It was a function of the sixth month of job gains and a drop (to 62.8%) in the participation rate to its lowest level since March.

1 2 3 4
View single page >> |

Read more by Marc on his site Marc to Market.

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

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.