Investors, large and small were concerned, the bears chortled with glee and the few bulls cowered as markets fell across Asia, Europe and the US following the weaker than expected ‘flash’ report on the health of Chinese manufacturing.
It was the second big fall on sharemarkets around the world in two weeks and the reaction seemed to be out of proportion to the actual news.
Currencies moved – the Aussie dollar dropped sharply, losing all the gains of the day before and shutting up those talking up a rate rise in Australia, or rather an end to rate cuts.
It was trading around 87.50 in early Asian trading this morning, to muted cheers from the Reserve Bank. The greenback jumped against most currencies as volatility measures also rose noticeably.
The catalyst was HSBC/Markit’s preliminary Purchasing Managers’ Index which slipped to 49.6 in January from 50.5 in December, just below the 50 mark that separates growth and contraction.
That was worse than the forecast dip to around 50.3. The final version is out on January 30, along with the official survey of manufacturing, which looks at larger companies (against HSBC’s concentration on smaller businesses). The final survey could easily return to the 50 level (several flash reports in the past have been reversed).
HSBC Flash China Manufacturing PMI – One small dip in China graph shakes markets
Be that as it may, there does seem to be a feeling share values are stretched, especially in the US and any hint of bad news seems enough to trigger a fall – we saw that at the start of last week with a fall on Wall Street, triggering a big sell down here. Yesterday we had a second and we could get a third today.
But that’s a week away and investors fretted because there’s a great bearish tide out there about China (which has captured offshore sentiment about Australia), as well as other emerging economies (the so-called Brics).
Wall Street lost ground – down more than 1% (over 200 points at one stage), as were the S&P 500 and Nasdaq, echoing falls of a similar size in Europe.
Gold had a great day, leaping $US23 to $US1262 an ounce. US bond yields fell to six week lows with the 10 year yield around 2.79%. Oil jumped to around $US97.60 a barrel in New York, meaning expensive petrol here next week with the falling dollar.
But it wasn’t just fears about China, there were reports the central bank of Argentina has cut back support for its Peso, which plunged in value, losing 15% and triggering fears the country could be headed for default.
That wasn’t helped by power blackouts and looting reports from the country. Foreign reserves hit a seven year low this week and have fallen by a third in the past year.
The strongest home sales in the US in 2013 for seven years didn’t help sentiment on Wall Street, even though it added to the picture that the economy is doing much better than thought. But its the underlying concerns about valuations verses profits and the potential for further growth after the long rally since March, 2009 which are now coming to the fore.
Coming on top of China’s 4th quarter GDP data which showed a small slowing in the pace of activity in the three months to December (quarter on quarter growth slowed to 1.8% from 2.2% in the three months to September), the HSBC/Markit report provided more evidence for the bears to trumpet, which they did, sending shares and the Aussie dollar lower. That’s because the Aussie dollar and the Australian markets are favoured by bears for their negative punts on China.
The Aussie dollar fell more than half a per cent right after the flash report was released, to 87.90 USc from a daily trading high of US88.50 around 12.45 pm Sydney time. It fell half a cent in offshore trading.
Our shares, which had opened weakly, went agggh and fell sharply, losing more than 65 points at one stage, before staggering back in late trading to end down 1%, or around 57 points for the ASX 200. And they will fall further today given the big fall in the SPI futures market ahead of the end of trading this morning.
Much of the negativity came when the components of the HSBC report were examined.
Among the subindexes, overall new orders swung to a decline, while new export orders – already in contractionary territory – showed a faster rate of losses. The closely watched employment subindex also fell at a faster rate than in December. The work-backlog indicator signalled a fall, changing direction from the previous month, while the subindex for output rose, but at a slower rate.
But many economists thought the report not that remarkable. Indeed Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said in yesterday’s release.
"The marginal contraction of January’s headline HSBC Flash China Manufacturing PMI was mainly dragged by cooling domestic demand conditions. This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth. As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in 1H 2013.”
The AMP’s Dr Shane Oliver, while describing the report as disappointing, said it still indicated growth of around 7.5% (as have several previous readings below 50 in this survey.
TD Securities Asia-Pacific research chief Annette Beacher, repeated criticism of HSBC’s manufacturing gauge as a poor barometer of the Chinese economy.
“We don’t like the HSBC indicator as its predictive power is weak – i.e., it has predicted two Chinese hard landings over the last 18 months. Nevertheless, this indicator is the first to be released out of China for 2014, and is closely followed in the financial markets," she was reported as saying by Marketwatch.com.
And PNC Financial Services Group senior international economist Bill Adams said the downside surprise “calls for caution, but not angst.” Group senior international economist Bill Adams said the downside surprise “calls for caution, but not angst.”
“We are reluctant to read too deeply into this number. Chinese statistics, even ones as ably adjusted for seasonal variation as the HSBC PMI, tend to get a little fuzzier around the Lunar New Year holiday, which falls on Jan. 31 this year,” Adams wrote in a note following the data release.
And the negative news from China overshadowed positive news from South Korea where 2013 economic growth was stronger than expected.
The Bank of Korea’s GDP report showed the South Korean economy expanded at 3.9%, year on year, in the fourth quarter of 2013. That was a gain on the previous quarter’s 3.3% annual rate, even though quarter on quarter GDP growth slowed to 0.9% from 1.1%. Still, the annualised rate of the last half of 2013 is a very solid 4%.
By the way the South Korean report was issued four days after the Chinese released their 4th quarter of 2013 GDP data – without any of the criticism from western economists and other smartypants analysts who questioned the speed and reliability of the Chinese release so soon after the end of 2013.
HSBC Flash China Manufacturing PMI Full Release
