Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
The much anticipated HSBC China manufacturing PMI reading finally brought some cheer for Asian equities with good gains across the major bourses. The May reading came in at 49.7, much better than the expected 48.3 and also a strong improvement from the previous reading of 48.1. Most components of the reading showed strong improvement, particularly in output and orders. However employment lagged but analysts feel this shouldn’t be a problem as employment is generally a lagging indicator. The export component of the PMI at 52.5 was the highest in nearly 3.5 years.
It certainly looks like recent efforts by Chinese officials to stabilise growth are starting to pay off and now all eyes will be on the official reading on June 1st. The HSBC reading is from a smaller sample size and therefore is not as reliable as the official reading. Not only was this figure ahead of estimates, there was a lot of pessimism amongst traders heading into the data. As a result, positioning was mostly skewed to the downside and perhaps short covering helped illuminate today’s gains.
Nikkei leads Asia higher
With risk appetite improved, the yen has unwound and this has seen the Nikkei outperform the region today. In yesterday’s Asian trade, USD/JPY dipped below 100 but has since recovered significantly and is making its way back towards 102. Weekly fund flows data out of Japan this morning showed a big jump in Japan buying foreign bonds to the highest level since November 2013. Meanwhile foreign buying of Japan bonds also continues to fall away which gives a net negative effect on the yen. Japan’s manufacturing data also came in well ahead of the previous reading at 49.9 and this helped steer Japanese equities in the right direction.
The Nikkei managed to hold 14,000 this week and has since found some buyers off that key support level. In fact the whole risk complex has come back to life today and this has really fed through to the regional equities space. Solid gains in China and Australia are being led by materials plays which have underperformed quite significantly recently. I suppose the big question is whether this is the reversal everyone has been waiting for to regain some confidence. While I certainly hope we have seen the end of the recent slide, I feel these markets will remain choppy in the near term.
Risk assets are just juggling some extremely unpredictable events at the moment particularly with commodities remaining volatile. With this in mind it makes it harder to make an investment case until we start to see some stability. However, these conditions present some trading opportunities which I will try to highlight as we go.
Europe in for a firmer start
Looking ahead to European trade, the major bourses are pointing to a modestly firmer open following on from a positive Asia lead. While the single currency remains relatively sidelined against the greenback, there is an interesting trend developing against the sterling. The fundamentals seem to be diverging at the moment and we are headed for a pretty interesting session with a bit of activity on the economic calendar. Later today we have manufacturing and services PMIs for France, Germany and the region of which we need to see some strong numbers to prevent a further slide. Additionally the European parliamentary elections commence today and these are likely to cap any euro gains in the short term. If the elections show anti-Europe sentiment is gaining momentum then this could be a dampener on the euro in the near term. At the same time sterling is gaining momentum after a period of subdued trade. A strong retail sales reading yesterday along with BoE minutes showing a slightly more hawkish tone seems to be encouraging the bulls.
On the calendar today we have the revised GDP reading along with business investment and public sector borrowing data due out. EUR/GBP has broken 0.81 now and is trading at 18-month lows with most key indicators pointing towards further short term weakness. The only concern is that it might be oversold at the moment which means perhaps selling a bounce might be the safe strategy.
(EUR/GBP testing support)
